Founder Profile
C Corp vs S Corp for a Consultant
Consultants face three landmines that other founders do not: the Personal Service Corporation flat 21% rate, the IRS audit focus on consultant reasonable-salary, and the QBI Section 199A phaseout for Specified Service Trades or Businesses.
Updated May 2026. Not tax advice.
The verdict
S corp for consultants between roughly $90,000 and $241,950 of taxable income. Marginal above that.
Below $90k, the compliance cost outweighs SE-tax savings. Above the 2026 QBI threshold ($241,950 single, $483,900 joint), Specified Service Trades phase out of the QBI deduction, which reduces but does not eliminate the S corp advantage.
Landmine 1: The PSC trap if you pick C corp
A C corporation classified as a Personal Service Corporation under IRC Section 448(d)(2) and 269A pays a flat 21% on every dollar of taxable income. PSC classification triggers when substantially all activities involve services in health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting, and substantially all stock is owned by employees performing those services.
For most independent consultants, a C corp is automatically a PSC. The 21% flat rate plus dividend tax on distributions typically produces an effective rate above 40%, well above what an S corp shareholder pays.
Landmine 2: Reasonable salary scrutiny for consultants
The IRS audits one-person professional S corps more aggressively than any other category. The reason: the work is the owner. There is no "I worked one day a week and the business kept earning" defense available. Watson v Commissioner (8th Cir 2012) involved a CPA with $203,651 in distributions and $24,000 in salary; the court reclassified $67,044 as wages.
For a consultant billing $200,000 net profit, a defensible salary anchor is the BLS OEWS median for your occupation: typically $90,000 to $140,000 depending on specialty and geography. Setting salary at $40,000 to maximize the distribution is the classic audit trigger.
Source: Watson v Commissioner, 668 F.3d 1008 (8th Cir 2012); BLS Occupational Employment and Wage Statistics
Landmine 3: SSTB phaseout above $241,950
The Section 199A 20% QBI deduction is one of the main S corp advantages. Consultants are classified as Specified Service Trades or Businesses (SSTB), which means the deduction phases out completely above $241,950 single / $483,900 joint (2026 inflation-adjusted thresholds), with a phase-in range of $50,000 single / $100,000 joint.
- Below $241,950 taxable income: full 20% QBI deduction available
- $241,950 to $291,950 single: partial phaseout
- Above $291,950 single: zero QBI deduction for SSTB
For a high-earning consultant, the QBI benefit disappears entirely. The S corp still saves on self-employment tax above a reasonable salary, but the combined federal tax saving narrows.
Source: 26 U.S.C. Section 199A; IRS Rev Proc 2025-32 (2026 inflation adjustments).
The consultant-specific decision rule
- If consistent net profit is below $80,000: stay sole proprietor or single-member LLC. SE-tax savings will not cover S corp compliance.
- If $80,000 to $241,950: S corp election typically saves $5,000 to $18,000 per year after compliance. Defensible salary required.
- If above $241,950: SSTB QBI phaseout reduces benefit. S corp still saves on SE tax above salary but the gap narrows; some high-earning consultants find sole prop simpler and cheaper.
- C corp: rarely beats S corp for consultants because of the PSC flat 21%. Only consider if you plan to accumulate earnings for a specific corporate purpose and have a tax attorney structure it.
Sources
- 26 U.S.C. Section 448 (PSC definition)
- 26 U.S.C. Section 269A (PSC allocation)
- 26 U.S.C. Section 199A (QBI / SSTB)
- BLS OEWS wage data
Educational only. Consult a CPA familiar with the SSTB rules for your situation.