S corp plus Solo 401(k): the core tax strategy for profitable sellers

Once an online business is consistently profitable, two moves usually deliver the biggest savings: an S corporation election and a Solo 401(k).

The S corp election

For a sole proprietor or single-member LLC, 92.35% of profit is subject to 15.3% self-employment tax. The 12.4% Social Security portion stops at the 2026 wage base of $184,500, but the 2.9% Medicare portion has no cap, and an additional 0.9% applies above $200,000 single or $250,000 joint. An S corp instead pays you a reasonable salary, which is subject to payroll tax, and pays the rest as distributions, which are not.

On $180,000 of profit with an $80,000 salary, payroll tax savings are roughly $13,000 a year, less added costs for payroll and a separate return.

Adding a Solo 401(k)

If the business has no employees other than you and your spouse, a Solo 401(k) allows the following contributions under the 2026 limits:

• Employee deferral: up to $24,500, plus an $8,000 catch-up at age 50 or older, or $11,250 at ages 60–63. If your 2025 wages from the business topped $150,000, 2026 catch-ups must be Roth.
• Employer contribution: up to 25% of W-2 salary.
• Total: up to $72,000 plus catch-up.

With an $80,000 salary, deductible contributions come to $24,500 + $20,000 = $44,500. A spouse who works in the business and is paid a similar reasonable salary can double it.

Key numbers (2026): $24,500 deferral · employer 25% of salary · $72,000 total · Form 5500-EZ required once assets in all your one-participant plans combined exceed $250,000, and for the plan's final year.

Balancing the salary

A higher salary costs more payroll tax but raises the employer 401(k) contribution and can raise the QBI wage limit. Lowering the salary saves payroll tax, but it reduces the 401(k) contribution and invites reasonable-compensation scrutiny. The right figure comes from modeling these effects together.

The QBI deduction

E-commerce isn't a specified service business, so the 20% QBI deduction is available at any income, subject to the W-2 wage and property limit. For 2026 the threshold is $403,500 of taxable income for joint filers and $201,750 for single filers, and the limit phases in over the next $150,000 for joint filers or $75,000 for single filers. The deduction also can't exceed 20% of taxable income minus net capital gain. Owner salary reduces QBI but counts toward the wage limit.

In Connecticut

Connecticut's income tax starts from federal AGI, and the QBI deduction is taken after AGI, so it doesn't lower your Connecticut tax. The S corporation itself pays no Connecticut corporation business tax on its income, but it can elect the 6.99% pass-through entity tax (PET) each year on a timely filed return. If it does, you get a refundable credit for 87.5% of your share, and Connecticut keeps the other 12.5%. Because you don't add the PET back, however, it also lowers the income you report to Connecticut, so your net state cost is roughly 12.5% minus your Connecticut rate. The election pays only when the entity-level federal deduction saves more than that, so model it alongside salary and the 401(k). Our Connecticut guide has a worked example.

A worked example

A single Shopify seller nets $220,000. As an S corp with a $90,000 salary, she saves about $15,000 of payroll tax and contributes $24,500 + $22,500 = $47,000 to a Solo 401(k). Her QBI is about $100,600, which is profit after salary, the employer's payroll tax, and the employer contribution. The deferral she makes as an employee comes out of her wages, not QBI. As a result, her QBI deduction is about $20,100, versus roughly $37,900 as a sole proprietor. At 2026 rates, combined federal savings compared with a sole proprietorship with no plan are roughly $20,000, made up of about $15,000 of payroll tax and $5,000 of income tax. The income tax piece comes from the 401(k) contributions, which defer tax until withdrawal rather than eliminate it, and is partly offset by the smaller QBI deduction.

Common mistakes

1. Hiring an employee, even part-time, and leaving them out of the plan after they become eligible by working 1,000 hours in a year, or 500 or more hours in each of two consecutive years, which can disqualify the plan.
2. Missing the December 31 deadline to elect employee deferrals through payroll.
3. Forgetting to file Form 5500-EZ once combined plan assets pass $250,000, or for the plan's final year.
4. Electing S status mid-year without updating payroll.

How Summer Associates helps

Summer Associates models salary, 401(k), and QBI together, files the S election, sets up payroll, and keeps the plan compliant.

This guide is general education based on federal and Connecticut law as of 2026-11-15. State rules differ and facts matter. Before acting, get advice for your situation from Summer Associates or another qualified advisor.