The Real Cost of Running an S-Corp: Payroll, 1120-S, QBI, Health Insurance, Retirement (2026)
The only page that honestly prices the full ongoing S-Corp overhead and stitches the QBI deduction, health insurance rule, and retirement plan differences into the break-even decision.
Annual S-Corp Compliance Cost: The Honest Breakdown
| Cost Item | Low | High | Notes |
|---|---|---|---|
| Payroll service (one person) | $480/yr | $1,800/yr | Gusto Simple $480/yr; OnPay $480/yr; ADP Run ~$960/yr; Paychex ~$1,200/yr |
| Form 1120-S preparation | $800/yr | $2,500/yr | Solo bookkeeper/CPA to CPA firm; year 1 often higher |
| State S-election filings | $0/yr | $800/yr | CA $800 min included here; NY/NJ nominal to $200; most states $0 |
| Bookkeeping (if outsourced) | $0/yr | $4,800/yr | DIY: $0. QuickBooks Self + CPA: $1,200/yr. Full outsource: $4,800/yr. |
| Registered agent | $0/yr | $300/yr | Often already paying as LLC; no additional cost for S-election |
| SUBTOTAL (without bookkeeping) | $1,280/yr | $5,100/yr | Typical solo S-Corp: $1,800-$3,500/yr |
| SUBTOTAL (with full outsourced bookkeeping) | $3,080/yr | $9,900/yr | Fully outsourced all-in |
QBI 199A Deduction: How S-Corp Changes Your Deduction
IRC Section 199A provides a 20% deduction on qualified business income. For LLC default, your full net profit may be QBI. For LLC-as-S-Corp, only the K-1 distribution is QBI; your W-2 salary is not.
Impact example: $200,000 net profit, 24% marginal rate. LLC default: $200,000 QBI, $40,000 deduction, $9,600 tax saved. S-Corp with $100,000 salary: $100,000 distribution is QBI, $20,000 deduction, $4,800 tax saved. The S-election costs you $4,800 in QBI benefit. Your SE tax saving must exceed this.
2026 SSTB phase-out thresholds: $191,950-$241,950 (single); $383,900-$483,900 (MFJ). Service professions (health, law, accounting, consulting) lose the QBI deduction entirely above the top of this range. In the phase-out range, QBI interaction is the dominant factor in the S-Corp decision.
Self-Employed Health Insurance: The S-Corp Gotcha
IRC Section 1372 treats shareholders owning more than 2% of an S-Corp as partners for fringe benefit purposes. For health insurance:
Deduct premiums on Schedule 1 Line 17 (above-the-line). Up to earned income. Straightforward.
Premiums must be added to W-2 Box 1 wages by the employer. Then deducted on Schedule 1 Line 17. Net federal income tax wash, BUT the W-2 addition increases the base for Social Security if under the wage base. Requires payroll provider to handle correctly at year-end.
Practical impact: small (usually $0-$200 extra FICA on the health premium add-back for most solo owners). But requires the payroll provider to correctly add the premium to W-2 Box 1 at year-end. Gusto and OnPay handle this automatically. Some providers miss it and create a compliance error.
Retirement Plans: Solo 401(k) vs SEP IRA Under Each Structure
| Plan Type | LLC Default Contribution | S-Corp Contribution | Which Is Better? |
|---|---|---|---|
| Solo 401(k) | Employee: $23,000 deferral + Employer: up to 20% net SE income. Total up to $69,000 (2026 est) | Employee: $23,000 deferral + Employer: up to 25% W-2 wages. Total up to $69,000 (2026 est) | LLC default at low reasonable salary. S-Corp at high reasonable salary near the contribution limit. |
| SEP IRA | Up to 20% net SE income (effective ~18.6% of net profit). No employee deferral component. | Up to 25% of W-2 wages. Employer contribution only. | LLC default typically allows larger SEP contribution at equivalent income due to net SE income base vs W-2 wages. |
| SIMPLE IRA | $16,500 employee deferral (2026 est) + 3% match or 2% non-elective | Same: $16,500 employee deferral + 3% match or 2% non-elective | Roughly equivalent. SIMPLE IRA contribution mechanics do not significantly differ. |
Fringe Benefits: The >2% Shareholder Penalty
Under IRC Section 1372, these benefits become taxable to more-than-2% S-Corp shareholders (which means virtually every solo LLC electing S-Corp):
| Benefit | LLC Default | S-Corp (>2% shareholder) |
|---|---|---|
| Health insurance premiums | Deductible above-the-line | Add to W-2; deductible on personal return. Net wash on income tax; small FICA impact. |
| Group term life over $50k | Tax-free | Taxable as wages |
| Dependent care assistance | Up to $5,000 tax-free | Taxable as wages |
| Transit/parking benefits | Up to $315/mo tax-free | Taxable as wages |
| Section 127 education assistance | Up to $5,250 tax-free | Taxable as wages |
If you use the full fringe benefit menu (dependent care, transit, group term life), the annual S-Corp penalty can be $3,000-$8,000 per year compared to LLC default or C-Corp. This cost should be incorporated into your break-even calculation.
The All-In "Is It Still Worth It?" Calculation
This complete calculation is why the generic "S-Corp saves 15% on distributions" rule is misleading. With all costs included, the real benefit is typically 30-60% of the gross SE tax saving. Still meaningful at $150k+ income, but not the rule-of-thumb number.