The federal S corp tax rate is not a single corporate rate at all. S corporations generally pay no federal income tax at the entity level. Instead, the company’s profits flow through to the shareholders, who report their share on their personal returns and pay tax at their individual marginal rates, which run from 10% to 37% for 2026.1Internal Revenue Service. S Corporations So when someone asks what rate an S corp pays, the honest answer is another question: what’s the shareholder’s total taxable income for the year?
Why the Rate Is Personal, Not Corporate
A C corporation pays a flat 21% federal tax on its profits, and its shareholders pay again when those profits come out as dividends. An S corporation skips that first layer. The company files Form 1120-S as an informational return but owes no federal income tax in the ordinary case.1Internal Revenue Service. S Corporations
Each shareholder receives a Schedule K-1 showing their portion of ordinary business income, capital gains, interest, and other items. Those figures land on the shareholder’s Form 1040 and are taxed alongside wages and everything else the shareholder earned that year.2Internal Revenue Service. Instructions for Schedule K-1 (Form 1120-S) The tax is owed on the allocated share whether or not the company actually distributed cash. New owners sometimes learn this the hard way when they owe tax on money still sitting in the company account.
2026 Federal Brackets Applied to S Corp Income
Because S corp income is taxed on the shareholder’s personal return, the applicable rate depends on the shareholder’s total taxable income from all sources. The seven federal brackets for 2026 are:3Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates
- 10%: up to $12,400 single / $24,800 married filing jointly
- 12%: $12,401–$50,400 single / $24,801–$100,800 joint
- 22%: $50,401–$105,700 single / $100,801–$211,400 joint
- 24%: $105,701–$201,775 single / $211,401–$403,550 joint
- 32%: $201,776–$256,225 single / $403,551–$512,450 joint
- 35%: $256,226–$640,600 single / $512,451–$768,700 joint
- 37%: over $640,600 single / over $768,700 joint
The brackets are progressive. A single shareholder with $150,000 of taxable income doesn’t pay 24% on the whole amount. The first $12,400 is taxed at 10%, the next slice at 12%, and only the portion above $105,700 is taxed at 24%. The effective rate is well below the marginal bracket.
The Tax Cuts and Jobs Act originally set these rates through 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 Cuts the Effective Rate
The single biggest factor that lowers the real rate on S corp income is the Qualified Business Income deduction under Section 199A. For 2026, eligible taxpayers can deduct up to 23% of 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 is taken on the shareholder’s personal return and reduces taxable income.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 is effectively taxed on only 77 cents of every QBI dollar. That drops the federal rate on the business income from 37% to roughly 28.5%.
Income-Based Limitations
The full deduction is available to shareholders whose total taxable income falls below the lower threshold, approximately $201,750 for single filers and $403,500 for joint filers in 2026. Above those amounts, the deduction phases down based on the W-2 wages the S corporation pays and the unadjusted basis of its qualified property. If the business pays little in wages and owns few depreciable assets, the deduction can shrink significantly or disappear for high-income shareholders.5Office of the Law Revision Counsel. 26 U.S. Code 199A – Qualified Business Income
The 2026 phase-in range runs $75,000 above the threshold for single filers and $150,000 for joint filers. Above the top of that range the wage and property limits apply in full.
Specified Service Businesses
An extra restriction hits “specified service trades or businesses,” which include law, medicine, accounting, consulting, financial services, and athletics. Above the top of the phase-in range, the QBI deduction for these owners is eliminated entirely. Below the lower threshold, the restriction doesn’t apply at all, and inside the phase-in range the deduction is partially reduced.
Payroll Taxes on Owner Salary
For any S corp owner who works in the business, the total federal tax picture has to include payroll tax on the salary portion. The IRS requires an owner providing services to the company to receive “reasonable compensation” as W-2 wages.6Internal Revenue Service. S Corporation Employees, Shareholders and Corporate Officers
That salary is subject to FICA: 6.2% for Social Security and 1.45% for Medicare from both the employer and the employee, or 15.3% combined.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 distributed to the shareholder beyond reasonable compensation generally are not subject to FICA. That’s the payroll tax advantage of the S corp structure over a sole proprietorship or single-member LLC, where all net earnings are subject to self-employment tax. Setting salary too low invites the IRS to reclassify distributions as wages retroactively, with back taxes, interest, and penalties.9Internal Revenue Service. Wage Compensation for S Corporation Officers What counts as reasonable depends on the type of work, the owner’s experience, industry comparables, and the time the owner spends on the business. There is no safe-harbor formula.
Two Surtaxes That Can Apply
Two additional taxes can raise the total burden on S corp income for higher earners.
The Additional Medicare Tax adds 0.9% on top of the 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, 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 on certain investment income when modified adjusted gross income exceeds $200,000 single or $250,000 joint, also not indexed for inflation.11Internal Revenue Service. Questions and Answers on the Net Investment Income Tax For S corp shareholders, the NIIT generally does not apply to income from a business in which the shareholder materially participates. A passive shareholder who doesn’t work in the business can face the 3.8% NIIT on their share of S corp income on top of ordinary rates.
When the S Corp Itself Owes Federal Tax
There are two narrow situations where the S corporation pays federal tax at the entity level. Both primarily affect companies that converted from C corporation status.
Built-In Gains Tax
When a C corporation elects S status, appreciation that built up in its assets during the C corp years is not written off. If the S corporation sells those assets within five years of the conversion, the pre-election gain is taxed at the corporate level at 21%, the highest 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 corp since formation is never subject to this tax.
Excess Net Passive Income Tax
The second entity-level tax targets S corporations that still carry accumulated earnings and profits from C corp years and earn too much passive investment income. If more than 25% of gross receipts come from passive sources like rents, royalties, interest, and dividends, and the company has leftover C corp earnings and profits, the excess passive income is taxed at 21%.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 Three consecutive years of triggering this tax automatically terminates the S election.14Office of the Law Revision Counsel. 26 USC 1362 – Election; Revocation; Termination
State Taxes Don’t Always Follow the Federal Rate
Federal pass-through treatment does not guarantee the same result on the state return. Most states follow the federal S election, but the details vary. Some states impose a minimum franchise tax or filing fee regardless of income. A handful don’t recognize S corp status and tax the entity like a C corporation. Others impose a reduced entity-level tax on S corp income or require withholding on behalf of out-of-state shareholders. The state where the S corp operates and where its shareholders live both matter when calculating the actual all-in rate.