Many Fort Worth business owners reach a point where taxes start to feel heavier than they should. The business is profitable, work is steady, and cash flow is improving. Yet every April, it feels like too much of that hard earned profit disappears.
That is usually when the S Corporation question comes up.
In 2026, the rules around pass-through taxation, payroll taxes, and the Qualified Business Income (QBI) deduction are stable, which creates an opportunity. Instead of reacting to tax law changes, business owners can make proactive structure decisions that support long-term growth.
If you run a small business that’s growing, this guide will help you think clearly about whether a switch to S Corp in Texas makes sense for you.
Before getting into numbers, it helps to clear up one common misunderstanding.
An LLC is a legal structure. It provides liability protection under Texas law.
An S Corporation is not a separate legal structure. It is a federal tax election made with the IRS using Form 2553. An LLC can elect to be taxed as an S Corp. A corporation can also elect S status. But the S Corp itself is a tax classification, not a new entity you have to form from scratch.
The key takeaway is this: Texas business owners do not need to form a brand new corporation to become an S Corp. They can keep their LLC and elect S status for tax purposes.
That flexibility is one reason the S Corp is so popular among growing service businesses.
By default, a single-member LLC is taxed as a sole proprietorship. A multi-member LLC is taxed as a partnership. In both cases, the business itself does not pay federal income tax. Instead, profits pass through to the owner’s personal return.
Here is where the friction comes in.
All net profit is subject to:
In 2026, the self-employment tax remains 15.3% on net earnings up to the Social Security wage base, with Medicare continuing beyond that threshold.
If your business earns $120,000 in net profit, the full $120,000 is subject to both income tax and self-employment tax. There is no mechanism under default LLC taxation to split wages from profit.
The upside is simplicity. No payroll for the owner, fewer compliance filings, and lower administrative costs. For businesses with modest or inconsistent profits, this can still be the right choice.
But as profits grow, so does the self-employment tax.
An S Corp election allows you to divide your income into two categories:
The IRS requires S Corp owners who actively work in the business to pay themselves a reasonable salary. That salary is subject to payroll taxes.
Any remaining profit can be distributed as owner distribution. Distributions are still subject to income tax, but they are not subject to self-employment tax.
This is where potential savings occur.
For example, imagine a Fort Worth HVAC owner earns $150,000 in net profit.
Under default LLC taxation, the entire $150,000 is subject to self-employment tax.
Under an S Corp election, the owner might pay themselves a $85,000 salary and take $65,000 as distributions. Payroll taxes apply only to the $85,000 salary.
The difference in payroll tax exposure can result in significant savings, even after accounting for payroll processing and tax preparation costs.
The IRS continues to emphasize reasonable compensation standards. Owners cannot artificially lower salaries to avoid payroll taxes. Compensation must reflect market rates for similar roles. The IRS provides guidance on reasonable compensation factors, including duties performed, time devoted to the business, and industry standards.
Texas does not have a personal state income tax. That simplifies the analysis compared to states with additional income tax layers.
However, Texas does impose a franchise tax on certain businesses, once revenue exceeds specific thresholds. Both LLCs and S Corps can be subject to the Texas franchise tax depending on total revenue.
The Texas Comptroller provides updated annual thresholds and filing requirements. For 2026, the no tax due threshold is $2,650,000 in annualized total revenue. For many smaller businesses, revenue falls below that threshold. But once revenue grows, franchise tax planning becomes part of the conversation regardless of entity type.
Switching to an S Corp does not eliminate Texas franchise tax exposure. It primarily affects federal self-employment taxes.
The QBI deduction allows eligible pass-through business owners to deduct up to 20% of qualified business income.
This deduction applies to both LLCs and S Corps, subject to income limits and service business rules. The IRS continues to publish annual income thresholds that determine whether wage limitations apply. For tax year 2026, the QBI phase-out begins at approximately $201,775 for single filers and $403,500 for married couples filing jointly.
For many trades and service providers in Fort Worth, the QBI deduction remains a significant benefit in 2026. When evaluating an S Corp election, it is important to model how salary levels impact QBI calculations. Higher wages can reduce qualified business income. Lower wages can increase scrutiny under reasonable compensation rules.
An S Corp election tends to make sense when three conditions are present.
First, the business generates a consistent net profit, often above $60,000 to $80,000 annually after paying all expenses.
Second, the owner is actively working in the business and drawing income regularly.
Third, the expected payroll tax savings exceed the additional compliance costs.
If profits fluctuate dramatically or remain relatively low, the added payroll and filing requirements may not justify the savings.
Switching to an S Corp is not just a tax label change. There are also bookkeeping standards that need to be tighter, commingling funds becomes even more problematic, and documentation matters more.
You must:
Owners should be prepared to take on the additional complexity and the associated costs (e.g bookkeeping, payroll) that come with an S corp.
There is no universally correct answer. The key is aligning your structure with how your business actually operates.
At Adam Traywick, CPA, we work with Fort Worth small businesses, trades, and professionals to make the financial side of business run smoother. We help clients run side by side projections to see if an S corp makes sense for you, before making any changes.
If you are wondering whether switching to an S Corp in 2026 could reduce your tax burden while supporting your growth, book a call with us. We’d be happy to guide you through this decision.
Until next time.
