2026 tax year · Tennessee
Is an S-corp election worth it in Tennessee?
Tennessee does not recognize the federal S election. It taxes the company as a C corporation, so electing here creates a state tax rather than avoiding one.
Work it out on your own numbers
The figures below use $100,000 of profit and our standard assumptions. Put your own in instead, this compares staying a sole proprietor against electing, with Tennessee's own charges on the company included:
Salary share and withdrawal share are percentages. The withdrawal figure only affects the C corporation, it is what decides whether the second layer of tax applies at all.
Enter your figures above and press Compare.
What the election is worth on $100,000 of profit
A single filer taking the standard deduction, paying themselves 40% of profit as salary, with $1,500 a year of payroll and filing cost:
| Tax as a sole proprietor | $22,365 |
| Tax as an S-corp, federal and personal state | $17,147 |
| Saving from the payroll-tax split alone | $5,218 |
| What Tennessee charges the company | − $3,350 |
| Net saving | $1,868 |
Tennessee charges the company 6.5% of net income above $50,000 plus a $100 minimum.
- Tennessee net worth or capital tax. Tennessee charges the company on its net worth or capital rather than its income. That needs a balance sheet, so it is not in the figure above.
The profit range where it actually pays in Tennessee
Between about $20,000 and $210,000 of profit. It stops paying above that: the payroll saving flattens once salary passes the Social Security wage base, while Tennessee's charge keeps climbing with profit.
| Net profit | Sole proprietor | S-corp, all in | Difference |
|---|---|---|---|
| $60,000 | $12,037 | $9,678 | saves $2,360 |
| $100,000 | $22,365 | $20,497 | saves $1,868 |
| $150,000 | $37,608 | $36,232 | saves $1,375 |
| $250,000 | $65,815 | $71,620 | costs $5,805 |
What Tennessee does differently
Tennessee levies no personal income tax, so the entire question here is federal. The election saves payroll tax on the distribution and nothing else, there is no state layer for it to move, and no state return for the S-corp's owners to reconcile.
The Tennessee detail
Tennessee does not recognize the federal S election and taxes an S corporation as a C corporation: 6.5% excise tax on net earnings, plus a franchise tax of the greater of $0.25 per $100 of net worth or $100. A $50,000 standard deduction against net earnings applies from tax year 2024. Electing S status in Tennessee creates a state tax rather than avoiding one, this is the clearest case where the federal saving can be wiped out.
How much salary to pay yourself
Enter your figures above and press Calculate.
Less salary means less payroll tax, so the arithmetic always points at the smallest salary you can justify. That is exactly why it is not a number to optimize: compensation has to be reasonable for the work you do, and the penalty for getting it wrong is reclassification plus back payroll tax. The cheapest row here is the riskiest one.
| Salary share | Salary | Distribution | Total tax | vs sole proprietor |
|---|---|---|---|---|
| 20% | $20,000 | $76,970 | $13,543 | $8,821 |
| 30% | $30,000 | $66,205 | $15,345 | $7,019 |
| 40% | $40,000 | $55,440 | $17,147 | $5,218 |
| 50% | $50,000 | $44,675 | $18,949 | $3,416 |
| 60% | $60,000 | $33,910 | $20,750 | $1,614 |
What this assumes
- Single filer, standard deduction, the business as the only income.
- 40% of profit taken as salary in the headline figures.
- $1,500 a year for payroll and a separate 1120-S, a cost estimate, not a tax figure, and it varies by provider.
- Comparing against a sole proprietorship. If you already trade through an LLC, some state fees are owed either way and are not a cost of electing.
- Anything listed as not modeled above is genuinely owed, it is excluded because it does not depend on profit, not because it is nil.
What these words mean
- Franchise tax
- A charge for the privilege of operating as a company in a state. Despite the name it has nothing to do with franchises, and it is often owed whether or not the business made money.
- Excise tax
- Used by some states as the name for their tax on business earnings. Despite the name it is not a tax on a particular product here, it is the state’s corporate income tax under another label.
- C corporation
- A company taxed as a separate taxpayer in its own right, so profit is taxed once to the company and again to the owner when paid out. The thing an S corporation election is meant to avoid.
- S corporation election
- Asking the tax office to treat your company as a pass-through, so profit is taxed to you rather than to the company. The owner takes a salary and the rest as a distribution, which is what saves payroll tax.
- Distribution
- Profit paid out to a company’s owner that is not salary. It is not subject to payroll or self-employment tax, which is the whole point of the S corporation election. And why the salary has to be defensible.