The real cost of running an S-Corp: payroll, 1120-S and state fees

Updated October 22, 2026 · By the Solo Tax Optimizer team · Not tax advice

S-Corp tax savings get a lot of attention, but the costs are easy to underestimate. Every dollar you spend running the S-Corp comes straight off the saving, so it is worth adding them up before you elect.

The ranges below are typical for a one-owner service business. Your prices will depend on your provider, your state and how complex your books are.

1. Payroll

As an S-Corp owner-employee, you must be paid a salary through payroll, with tax withheld and payroll tax returns filed. Most owners use a payroll service. Plans for a single employee commonly cost $40 to $150 per month, or roughly $500 to $1,800 a year.

Payroll involves:

• Withholding federal and state income tax and your 7.65% share of FICA.
• Paying the company's matching 7.65% FICA.
• Depositing taxes on schedule and filing Form 941 each quarter and Form 940 each year.
• Issuing a W-2 and filing it with the Social Security Administration.

2. Unemployment taxes

Your salary is also subject to federal unemployment tax (FUTA): 6.0% of the first $7,000 of wages, usually reduced to 0.6%, or $42, with the credit for state unemployment taxes paid. State unemployment insurance varies widely, from under a hundred to several hundred dollars a year for one employee. A few states also charge disability or paid-leave contributions.

3. The S-Corp tax return (Form 1120-S)

An S-Corp files its own federal return, Form 1120-S, and gives each owner a Schedule K-1 to report their share of profit on their personal return. The return requires a balance sheet and careful tracking of shareholder basis and distributions. Professional preparation commonly costs $1,000 to $3,000 or more, on top of your personal return.

4. Bookkeeping

S-Corps need cleaner books than most sole proprietors keep: separate bank accounts, no mixing of personal expenses, and accurate records of distributions. Expect to pay for accounting software, and possibly a bookkeeper, roughly $300 to $3,000 a year depending on how much you do yourself.

5. State taxes and fees

Some states treat S-Corps differently from sole proprietorships, which can add a cost:

• California charges S-Corps a 1.5% franchise tax on net income, with an $800 minimum.
• New York City does not recognize the federal S-Corp election, so the business may owe city corporate tax.
• Tennessee charges its franchise and excise taxes on both LLCs and S-Corps.
• Many states charge annual report fees for corporations and LLCs. These usually apply whether or not you elect S-Corp status.

6. A smaller QBI deduction

This one doesn't show up on an invoice. Your S-Corp salary does not count as qualified business income, so your QBI deduction usually falls after electing. For example, a $50,000 salary removes up to $10,000 of QBI deduction, which might cost $1,200 to $2,400 of income tax at the 12% to 24% brackets.

Adding it up

For many one-person businesses, the total lands between $2,000 and $5,000 a year, before the change in QBI. Compare that with your payroll tax saving to see whether the election is worthwhile. See when to elect S-Corp status for worked examples.

Ways to keep costs down

• Choose a payroll plan designed for one-person companies. Some include tax filings at no extra cost.
• Pay yourself on a monthly or quarterly schedule to reduce payroll runs.
• Keep bookkeeping current through the year so year-end tax preparation is faster.
• Ask your tax preparer for a bundled price for the 1120-S and your personal return.

Frequently asked questions

This guide explains general federal tax rules for the 2026 tax year. It is not tax, legal or financial advice. Your situation may differ, so talk to a qualified tax professional before acting on it.