The $1,248 the S-corp pitch forgets.

What the pitch counts, and what it leaves out

Let us begin with the pitch as it is usually made, because it is a good pitch and most of it is true. As a sole proprietor you pay self-employment tax on all of your net earnings. As an S-corp you pay yourself a salary, pay payroll tax on that, and take the rest as a distribution which is not subject to it. The gap is the saving, and the saving is real.

Set against that saving, most comparisons count California's $800 minimum franchise tax, the 1.5% state tax on S-corp income, a payroll service, a corporate return, and the qualified business income deduction that shrinks when you pay yourself a wage.

What almost none of them count is the thing that happened quietly on the day the salary started. A corporation that pays you is an employer. You are now standing on both sides of that sentence — the one issuing the wage and the one receiving it — and California taxes both.

The two lines that go missing

There are two, and one of them is much larger than the other.

The second line is small and flat — those taxes stop at the $7,000 wage base, so they are about $287 at any realistic salary. The first is the one that matters, because California removed the SDI wage cap on 1 January 2024. It is now 1.3% of the entire salary with no ceiling, so it scales with every raise you give yourself.^[1]

A sole proprietor pays none of this. Self-employment tax does not include state disability, and a self-employed person is only covered if they opt in separately.

What it does to the answer

Adding the missing line to our own engine moved the numbers more than we expected. At 50% salary, on the site's worked example:

At the bottom of that table the verdict flips. A practice clearing about $94,000 was being told to incorporate and should not bother — which is exactly the margin where someone actually needs the answer, and exactly where a rule of thumb is least useful.

You can escape the SDI, but not for free

There is a way out of the larger line, and it is worth knowing precisely because it is opt-in. A corporate officer who is the sole shareholder — or the only shareholder besides a spouse — may file form DE 459 and be excluded from State Disability coverage, under section 637.1 of the Unemployment Insurance Code.^[2]

Three things follow, and they are why our engine models the default rather than the exception.

• Nothing happens automatically. A therapist who incorporates and files nothing pays SDI.
• It is not free money. The exclusion gives up State Disability and Paid Family Leave cover. For a solo practitioner with no sick pay and no employer behind them, that is a real trade, not a loophole.
• It covers SDI only. The form says so itself: the corporation must still report your wages and pay Unemployment Insurance and Employment Training Tax. The $287 is not escapable.

So the honest framing is not “you can avoid this”. It is: this costs $1,248 a year unless you deliberately give up your disability cover, in which case it costs you that cover instead.

Why this is easy to miss

Worth saying plainly, because we missed it ourselves for months. Our engine already charged Unemployment Insurance, ETT and FUTA correctly — on associate wages, a few functions away in the same file. It simply never charged them on the owner's own salary, and never modeled SDI at all.

There was also a variable in that engine named SDI. It holds 0.124 — the Social Security rate, not California State Disability. Searching the code for “SDI” found it, and it looked handled.

If you are checking your own accountant's spreadsheet, or anyone else's calculator, that is the line to look for: does the corporation's side charge anything at all for California payroll on your own wage? If it does not, the comparison is flattering the corporation by roughly $1,500 a year.