Do You Really Lose the 20% Deduction if You Become an S Corp? Here’s the Real Math.

Mia Chavez
Nov 15
2 min read

you're an LLC earning around $100,000, you’ve probably heard this advice at some point:

"Don’t switch to an S Corporation — you’ll lose the 20% deduction."

At first glance, it sounds serious. But at Tangerine Business Services, we run the numbers every day — and the reality is very different.

Let’s break it down clearly, so you can make an informed decision that could save you thousands.

💡 What's the 20% Deduction?

This refers to the Qualified Business Income (QBI) deduction, part of the 2017 Tax Cuts and Jobs Act. It allows eligible small business owners to deduct up to 20% of their net business income from their taxable income.

✅ LLCs, sole proprietors, partnerships, and S Corporations all qualify for the deduction.

So no — you don’t "lose" the deduction by electing S Corp status. But the way it’s calculated does change.

🔍 Example: $100,000 in Net Income

Let’s compare two scenarios: staying as a Schedule C (LLC) or electing to be taxed as an S Corp. We'll assume you're a married couple filing jointly and below the QBI income threshold, so you're eligible for the full deduction.

📌 Scenario 1: LLC / Schedule C

Net Income: $100,000
QBI Deduction (20%): $20,000
Taxable Income: $80,000
Self-Employment Tax (15.3%) on $100,000: $15,300

✅ No W-2 wages🚫 No employer tax deduction🧾 You pay full SE tax on the $100K

📌 Scenario 2: S Corporation

Let’s say you pay yourself a reasonable salary of $50,000 and take the remaining $50,000 as profit.

W-2 Salary: $50,000
S Corp Profit: $50,000
QBI Deduction (20% of profit): $10,000
Taxable Income: $90,000
Payroll Tax on Salary (15.3%): $7,650
- Half paid by employee (your personal return): $3,825
- Half paid by employer (your S Corp): $3,825✅ The employer portion is tax-deductible to the business

So, actual business profit is:

$50,000 minus $3,825 (employer tax) = $46,175

Then you get 20% QBI deduction on $46,175, which is $9,235 (not the full $10,000, because employer taxes reduce profit).

Your taxable income is:

$50,000 (W-2) + $46,175 (net business profit) = $96,175
Minus QBI deduction ($9,235) = $86,940

🧮 Side-by-Side Tax Comparison

	Schedule C	S Corporation
Gross Income	$100,000	$100,000
QBI Deduction	$20,000	~$9,235
Taxable Income	$80,000	~$86,940
Self-Employment Tax	~$15,300	~$7,650 (payroll tax)
Employer Payroll Tax Deduction	❌ No	✅ ~$3,825
Net Tax Advantage	—	Savings of ~$7,650

Even though the QBI deduction is smaller with an S Corp, the self-employment tax savings and employer tax deduction more than make up for it — especially as your income grows.

✅ Bottom Line

The myth that “you lose the 20% deduction” with an S Corp is just that — a myth.

Here's what really happens:

You still qualify for the QBI deduction.
It’s calculated only on the S Corp’s net profit, not your W-2 wages.
You save thousands in self-employment tax.
You also get a tax deduction for the employer’s share of payroll taxes.

📞 Want to Know If an S Corp Is Right for You?

At Tangerine Business Services, we break it down for you — numbers, deductions, savings, and strategy.

📅 Book your free consultation today at TangerineBiz.com and let’s make sure your business is set up for maximum savings.