How the IRS treats $100K income differently for employees and business owners

The IRS taxes $100,000 differently for employees and business owners, highlighting how the tax code favors entrepreneurship and financial independence over employment.

A single W-2 employee earning $100,000 falls into the 22% federal income tax bracket and owes $22,000 in federal income tax. Limited deductions make their tax liability straightforward and often higher than business owners. Although the self-employment tax rate is set at 15.3%, business owners have flexibility in determining how much of their profits are subject to it.

However, self-employed individuals or business owners have more flexibility in reducing their tax burden. A business owner with $100,000 in profits can deduct $25,000 in business expenses to pay only the 15.3% SE tax on $75,000. By electing S-Corp taxation, they can pay themselves a reasonable salary of $50,000, subject to payroll taxes (Social Security and Medicare) but not self-employment tax. They can then take $15,000 as a distribution, not subject to self-employment tax. This leaves only $10,000 subject to the 15.3% self-employment tax, significantly reducing their tax liability.

Strategically using deductions, salary structuring, and S-Corp election empowers business owners to legally minimize taxes and keep more of their earnings—something W-2 employees have far less control over.

Bobb Rousseau, PhD