The S corp tax rate is not a single corporate rate. S corporation profits pass through to the shareholders and are taxed on their personal returns at ordinary individual rates, which run from 10% to 37% for 2026.1Internal Revenue Service. S Corporations The company itself files Form 1120-S but, in most situations, owes no federal income tax at the entity level. That single-layer treatment is the structural point of S status: earnings are taxed once, at the owner, instead of once at the corporation and again on dividends the way C corporation profits are.
Because the tax lives on the shareholder’s Form 1040, the rate that applies to any given dollar of S corporation income depends on the shareholder’s total taxable income from all sources that year, not on anything intrinsic to the business.
How the Pass-Through Reaches Your Personal Return
A C corporation pays a flat 21% federal tax on its own profits, and shareholders pay tax again when those profits come out as dividends. An S corporation skips the first layer. It reports income, deductions, and credits on Form 1120-S and issues each shareholder a Schedule K-1 showing that shareholder’s proportional slice of ordinary business income, capital gains, interest, and other items.2Internal Revenue Service. Instructions for Schedule K-1 (Form 1120-S) The shareholder enters those figures on their personal return and the income is taxed alongside wages, investment returns, and anything else they earned.
One consequence catches new owners off guard: you owe tax on your allocated share whether or not the company actually distributed the cash. Profits sitting in the business bank account are still taxable to you.
2026 Federal Rates That Apply to S Corp Income
Because the income lands in the ordinary brackets, these are the rates in play for 2026:3Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
- 10% — up to $12,400 single / $24,800 married filing jointly
- 12% — $12,401 to $50,400 / $24,801 to $100,800
- 22% — $50,401 to $105,700 / $100,801 to $211,400
- 24% — $105,701 to $201,775 / $211,401 to $403,550
- 32% — $201,776 to $256,225 / $403,551 to $512,450
- 35% — $256,226 to $640,600 / $512,451 to $768,700
- 37% — over $640,600 / over $768,700
The brackets are progressive, so only the income inside each range is taxed at that range’s rate. A single shareholder with $150,000 of taxable income does not pay 24% on the whole amount. The first $12,400 is taxed at 10%, the next slice at 12%, and so on, with only the portion above $105,700 reaching the 24% bracket. The effective rate sits well below the top marginal rate that applies.
These rates were originally scheduled under the Tax Cuts and Jobs Act to expire after 2025. The One Big Beautiful Bill Act made them permanent starting in 2026 and adjusted the thresholds for an additional year of inflation.4Congress.gov. Tax Provisions in H.R. 1, the One Big Beautiful Bill Act
The QBI Deduction Lowers the Effective Rate
The biggest single factor that reduces the real tax rate on S corporation income is the Qualified Business Income deduction under Section 199A. For 2026, eligible shareholders can deduct up to 23% of their qualified business income from a pass-through entity, up from the 20% rate that applied from 2018 through 2025.4Congress.gov. Tax Provisions in H.R. 1, the One Big Beautiful Bill Act The deduction comes off taxable income on the personal return rather than operating as a credit.5Office of the Law Revision Counsel. 26 U.S. Code 199A – Qualified Business Income
A shareholder in the 37% bracket who qualifies for the full 23% deduction effectively pays tax on only 77 cents of every dollar of QBI, pulling the effective federal rate on that income from 37% down to roughly 28.5%.
Income Thresholds and Phase-Ins
The full deduction is available without restriction when the shareholder’s total taxable income is below the lower threshold. For 2026, that threshold is approximately $201,750 for single filers and $403,500 for married filing jointly. Above those amounts, the deduction phases down based on two tests: the W-2 wages the S corporation pays and the unadjusted basis of its qualified property, meaning items like equipment and real estate. A business that pays little in wages and holds few depreciable assets can see the deduction shrink substantially or vanish for high-income owners.5Office of the Law Revision Counsel. 26 U.S. Code 199A – Qualified Business Income
The 2026 phase-in range extends $75,000 above the lower threshold for single filers and $150,000 for joint filers, a wider window than earlier years. Past the top of that range, the W-2 wage and property limits apply in full.
Specified Service Businesses
A tighter restriction applies to “specified service trades or businesses,” which include law, medicine, accounting, consulting, financial services, and athletics, among others. If you own an S corporation in one of these fields and your taxable income exceeds the top of the phase-in range, the QBI deduction is fully eliminated. Below the lower threshold, the restriction does not apply at all; within the phase-in range, the deduction is partially reduced.
Payroll Taxes on Owner Salary
For any owner who works in the business, the rate conversation does not end at income tax. The IRS requires an owner-employee who provides more than minor services to the company to take “reasonable compensation” as W-2 wages.6Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers That salary carries FICA: 6.2% Social Security and 1.45% Medicare on both the employer and employee sides, totaling 15.3% on the combined basis.7Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates The Social Security portion applies only to wages up to $184,500 in 2026; Medicare has no cap.8Social Security Administration. Contribution and Benefit Base
Profits paid out to the shareholder beyond reasonable compensation are generally not subject to FICA. That is the central payroll-tax advantage of the S corporation structure over a sole proprietorship or single-member LLC, where all net business earnings are hit by self-employment tax. The temptation runs in one direction: set salary low, take the rest as distributions, save on payroll tax. The IRS watches for this, and if the salary looks unreasonably low it can reclassify distributions as wages, with back payroll taxes, interest, and penalties attached.9Internal Revenue Service. Wage Compensation for S Corporation Officers What counts as reasonable depends on the type of work, the owner’s experience, comparable industry salaries, and the hours the owner puts in. There is no safe-harbor formula, and this is one of the most frequently audited S corporation issues.
Surtaxes That Can Raise the Rate
Two additional federal taxes can push the total rate higher for higher-earning shareholders.
The Additional Medicare Tax adds 0.9% on top of the standard 1.45% Medicare rate for W-2 wages above $200,000 for single filers or $250,000 for joint filers. It applies to the shareholder’s salary from the S corporation, not to distributions. The thresholds are not indexed for inflation.10Internal Revenue Service. Questions and Answers for the Additional Medicare Tax
The Net Investment Income Tax is a separate 3.8% tax that applies to certain investment income once modified adjusted gross income exceeds $200,000 single or $250,000 joint, also unindexed.11Internal Revenue Service. Questions and Answers on the Net Investment Income Tax For an S corporation shareholder, the NIIT generally does not apply to income from a business in which the shareholder materially participates. A passive investor who does not work in the business, though, can see their share of S corp income hit with the 3.8% NIIT on top of ordinary income tax rates. Material participation status is worth tracking carefully for that reason.
When the S Corporation Itself Owes Federal Tax
Pass-through treatment has two narrow exceptions where the S corporation pays federal tax at the entity level. Both mainly affect companies that converted from C corporation status.
The first is the built-in gains tax. When a C corporation elects S status, appreciation that built up in its assets during the C years does not get a free pass. If the S corporation sells those assets within five years of conversion, the gain attributable to the pre-election appreciation is taxed at the corporate level at 21%, the top rate under Section 11(b).12Office of the Law Revision Counsel. 26 U.S. Code 1374 – Tax Imposed on Certain Built-In Gains Gains recognized after the five-year window are exempt. A corporation that has been an S corporation since formation is never subject to this tax.
The second is the excess net passive income tax. If an S corporation still carries accumulated earnings and profits from its C corporation days and more than 25% of its gross receipts come from passive sources like rents, royalties, interest, and dividends, the excess passive income is taxed at 21% at the corporate level.13eCFR. 26 CFR 1.1375-1 – Tax Imposed When Passive Investment Income of Corporation Having Subchapter C Earnings and Profits Exceed 25 Percent of Gross Receipts Trigger this tax three years in a row and the S election is automatically terminated, reverting the company to C status.14Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination
State Tax Can Change the Total
Federal pass-through treatment does not guarantee the same result on your state return. Most states follow the federal S election, but the details vary. Some states impose a minimum franchise tax or filing fee on S corporations regardless of income. A handful do not recognize S corporation status and tax the entity like a C corporation. Others impose a reduced entity-level tax on S corporation income, or require the S corporation to withhold estimated tax on behalf of out-of-state shareholders. The state where the business operates and the states where its shareholders reside both matter when figuring the true all-in rate on S corporation income.