If you are a high earner and not in the out-of-favor specified service trade or business group, as explained in Tax Reform Sticks It to Doctors, Lawyers, Athletes, Traders, and Others, you may want to consider operating as an S corporation to qualify for the Section 199A 20 percent tax deduction.
If you currently file as a Schedule C tax payer because you receive 1099s, operate a single-member LLC, or do business as a proprietor, you can qualify for the 20 percent tax break allowed by Section 199A of the tax code if your business and taxable income are just right.
And this is no longer a break with an expiration date. Section 199A was scheduled to die on December 31,2025. The One Big Beautiful Bill Act (OBBBA) repealed that sunset and made the 20 percent deduction a permanent part of the tax code. Beginning with your 2026 tax return, the OBBBA also (1) widens the phase-inrange that governs the strategy in this article, and (2) adds a $400 minimum deduction.
But if your taxable income is too high and you don’t have a payroll or own depreciable property, this break collapses to that $400 minimum—when it could have been worth tens of thousands of dollars to you. Creating an S corporation may be your fix for this problem.
What Creates the Problem?
To qualify for the full 20 percent deduction on your qualified business income under tax code Section 199A, you need 2026 defined taxable income of less than $201,750 (single) or $403,500 (married).
If your 2026 taxable income is greater than $276,750 (single) or $553,500 (married), you don’t qualify for the Section 199A deduction beyond the $400 minimum unless you have wages or property.
Note how far those ceilings moved. The OBBBA widened the phase-in range from $50,000 to $75,000 above the threshold for single filers and from $100,000 to $150,000 for married joint filers. The practical effect is that the danger zone starts later and the landing is gentler than it was under the old rules.
Example.
You are single, are not in the out-of-favor specified service trade or business group, operate a sole proprietorship that generates $400,000 of proprietorship net income, and have taxable income of $370,000. In this scenario, your Section 199A tax deduction is $400—the new statutory minimum—and nothing more.
S Corporation to the Rescue
Here’s how the S corporation can help you.
First, to turn your sole proprietorship into an S corporation, you need to either incorporate the proprietorship or turn the proprietorship into a single-member LLC. Once you have either of these entities, you use IRS Form2553 to elect S corporation status.
Now that you have the S corporation in place, you use that S corporation to pay you a reasonable salary, which you base on your facts and circumstances, so we won’t have an exact number here. But let’s say your reasonable salary is $100,000.
With a salary in place, you create two benefits that did not exist before you elected S corporation status:
- A savings on your self-employment taxes.
- A Section 199A deduction
Self-Employment Tax Savings
As a proprietorship, you pay $33,591 in self-employment taxes on your $400,000 in proprietorship income.
You also pay the 0.9 percent additional Medicare tax on your self-employment earnings above $200,000, which adds $1,525. Your taxes total $35,116.
With the S corporation, you and the company combined pay $15,300 in FICA taxes on your $100,000 salary. You likely also pay unemployment taxes of, say, $500. This gives you a total of $15,800 in payroll taxes with the S corporation. And because your $100,000 salary sits below $200,000, you don’t pay the 0.9 percent additional Medicare tax.
You save $19,316 in payroll taxes with the S corporation ($35,116 – $15,800). And there’s more.
Section 199A Deduction
Remember, before the S corporation, your Section 199A tax deduction was the $400 minimum.
But that changes dramatically with your S corporation. Your wages of $100,000 drop your qualified business income to $300,000 (to keep the arithmetic clean, we ignore the S corporation’s share of the payroll taxes). Your calculation of the Section 199A deduction requires a two-step process. In step 1, you find the lesser of
- $60,000 (20 percent of your qualified business income of $300,000), or
- $50,000 (the greater of 50 percent of the S corporation’s $100,000 of W-2 wages, or 25 percentof those wages plus 2.5 percent of your depreciable property, which is zero).
In step 2, you claim as a tax deduction the lesser of
- $50,000 from step 1 above, or
- $74,000 (20 percent of your $370,000 taxable income, reduced by any net capital gain).
Given the 35 percent tax bracket for 2026, your $50,000 deduction puts $17,500 in your pocket. You already had a $400 deduction as a proprietor, worth $140, so call the net gain from the S corporation $17,360.
Great Result
In this example, you added $36,676 in after-tax cash to your bank account by making the switch from the proprietorship to the S corporation ($19,316 + $17,360)—and because Section 199A is now permanent, you can expect a comparable result year after year.
Reminders
As a Schedule C taxpayer in the Section 199A in-favor group with no wages or depreciable property and 2026 taxable income above the combined threshold and phase-in amounts ($276,750 single, $553,500 married), you get a Section 199A deduction of $400 minimum.
If your 2026 taxable income does not exceed the threshold amount ($201,750 single, $403,500 married), you make your Section 199A calculation by applying the 20 percent to your qualified business income without using any W-2 wages or property in the calculation. Easy-peasy.
But when your taxable income is above the thresholds and the phase-in, you need wages or property to qualifyfor more than the $400 minimum deduction.
To make the calculations easy, use the 199 A Deduction Calculator 2026.
Takeaways
The now-permanent 20 percent deduction on qualified business income gives high earners an additional reason to switch to an S corporation as their operating entity if they
- are not in the out-of-favor specified service trade or business group (doctors, lawyers,accountants, actors, athletes, traders, etc.),
- pay little or no wages, or
- own little or no depreciable property.
With the S corporation, paying the high earner a salary creates W-2 wages, which in turn can unlock the 20 percent deduction, as we explained in this article. Those newly established wages also generate payroll taxsavings.
To know how this would work for you, you need to run the numbers.
Make sure you get the numbers right. Spend money to have your tax professional help you, because you likely have more to consider in this calculation than just the payroll taxes and the 20 percent deduction.
One thing has changed in your favor since we first ran the numbers on this strategy: With the OBBBA sunsetgone, the payoff from getting the entity choice right is no longer limited to two or three years. Now you can cash in every year.