PEO Tools · Tax Position Analysis
CPA Verification Report
Sole proprietor electing S-corporation through the PEO · California · tax year 2026 · married filing jointly
Sample / illustrative
Prepared for review by the
prospect's tax advisor
prospect's tax advisor
Every figure in this report comes from one of three sources
Read this report by source. The tax computation is neutral: it applies fixed tax law to two independent sets of variables it does not choose, the prospect's facts and the broker's rate card. Change either input and the result recomputes mechanically.
Prospect inputthe prospect's facts
+
Broker rate cardthe broker's configured rates
→
Tax-law enginestatute applied, no discretion*
*The engine makes exactly two disclosed modeling choices, the reasonable-wage split and a conservative QBI treatment, called out where they occur. The California lines also carry two state-specific disclosures: the tax-year basis and the entity-level franchise tax.
Source 1, Prospect input
What the prospect entered
Net business profit
$120,000
$120,000
Current business structure
Sole proprietor (Schedule C)
Sole proprietor (Schedule C)
Filing status
Married filing jointly
Married filing jointly
Home state
California
California
Current health plan
Family, individual market
Family, individual market
Current premium paid
$2,200/mo ($26,400/yr)
$2,200/mo ($26,400/yr)
Source 2, Broker rate card
What the broker configured
Group health plan, Plan B, family tier
$2,076/mo ($24,912/yr)
$2,076/mo ($24,912/yr)
Broker configured service cost
$1,800/yr
$1,800/yr
Reasonable-wage split (assumption)
60% wage / 40% distribution
60% wage / 40% distribution
The broker's full card can price Plans A and C plus other coverage tiers. Only the selected Plan B family rate applies to this owner. The engine reads these rates as given. It does not set or adjust them.
Source 3, Tax-law engine
Federal computation
Fixed 2026 federal tax law applied to Sources 1 and 2. Current Schedule C position vs the same owner as an S-corp inside the PEO. Each line cites its source or authority.
| Line | Sole prop current | S-corp via PEO | Authority |
|---|---|---|---|
| Net business profit P | $120,000 | $120,000 | Source 1 |
| Reasonable W-2 wage B | none | $72,000 | 60% split, Source 2 |
| S-corp distribution (K-1) | none | $48,000 | IRC §1366 |
| Self-employment tax | $16,955 | none | IRC §1401, §1402(a) |
| Payroll tax on wage | none | $11,016 | IRC §3101(b), §3111(b) |
| Self-employed health deduction P | $26,400 | $26,400 | IRC §162(l)(2)(A); Notice 2008-1 |
| §199A QBI deduction (conservative) | $10,584 | $0 | IRC §199A; see note |
| Standard deduction (MFJ, 2026) | $32,200 | $32,200 | Rev. Proc. 2025-32 §4.14 |
| Federal taxable income | $42,338 | $55,580 | IRC §63 |
| Federal income tax | $4,585 | $6,174 | IRC §1(j); Rev. Proc. 2025-32 §4.01 |
| Payroll + federal subtotal | $21,540 | $17,190 | SE and wage payroll tax plus federal income tax |
P = Source 1 prospect figure B = Source 2 broker figure every other line is statute applied to them.
On the §199A line: wages are not qualified business income, so under S-corp only the K-1 distribution can generate a QBI deduction. This model also applies a conservative IRS-FAQ position that the self-employed health premium reduces QBI, a position the AICPA contests. It understates the S-corp deduction, so the benefit below is a floor, not a ceiling. California disregards §199A entirely; see the California section.
Source 3, Tax-law engine
California state computation
California is an own-base state: it starts from federal adjusted gross income, applies its own standard deduction and rate schedule, and does not recognize the federal §199A QBI deduction. Tax-year basis is noted below the table.
| Line | Sole prop current | S-corp via PEO | Authority |
|---|---|---|---|
| California starting point, federal AGI | $85,122 | $87,780 | Sch CA (540), Part I |
| Less California standard deduction (MFJ) | ($11,412) | ($11,412) | R&TC §17073.5; FTB 2025 Form 540 |
| §199A QBI, not recognized by California | $0 | $0 | California does not conform to IRC §199A |
| California taxable income | $73,710 | $76,368 | FTB Form 540, line 19 |
| Tax per Schedule Y (MFJ) | $1,676 | $1,783 | R&TC §17041; FTB 2025 Schedule Y |
| Less personal exemption credit (2 x $153) | ($306) | ($306) | R&TC §17054; FTB Form 540 |
| California personal income tax | $1,370 | $1,477 | FTB Form 540, line 64 |
| California S-corp franchise tax (entity, $800 minimum) | none | $800 | R&TC §23802(b), §23153 |
Two California-specific disclosures a reviewing CPA should note:
1. Tax-year basis. California indexes its brackets, standard deduction, and exemption credit annually. The 2026 indexed amounts are not yet published, and the FTB's own 2026 Form 540-ES instructs taxpayers to use the 2025 schedule when estimating 2026 tax. This report follows that guidance.
2. Entity-level franchise tax. California taxes the S-corporation itself at 1.5% of net income with an $800 annual minimum. At this profit, the $800 minimum applies. It is a real new cost that exists only in the S-corp column, included here conservatively.
| Total tax, payroll + federal + California personal + California franchise | $22,910 | $19,467 |
Annual reconciliation
| Payroll tax change, SE tax $16,955 becomes wage payroll tax $11,016 | + $5,939 |
| Federal income tax, higher under S-corp in this conservative treatment | − $1,589 |
| California personal income tax, slightly higher under S-corp | − $107 |
| California S-corp franchise tax, $800 minimum | − $800 |
| = Net income, payroll, and state tax saving | + $3,443 |
| Group plan vs individual market premium, $26,400 becomes $24,912 | + $1,488 |
| Broker configured service cost | − $1,800 |
| Net annual benefit to the owner | + $3,131 |
For reference, the same profile in a no-income-tax state nets +$4,038; the $907 difference is California's $800 S-corp franchise tax plus the $107 personal-tax differential.
Authorities and basis of preparation
Federal TY2026 parameters: Rev. Proc. 2025-32 (brackets §4.01, standard deduction §4.14, QBI thresholds §4.07).
Payroll and SE tax: IRC §1401, §1402(a), §3101(b), §3111(b); SSA 2026 COLA.
QBI: IRC §199A.
Self-employed health: IRC §162(l)(2)(A), §3121(a)(2)(B); IRS Notice 2008-1.
S-corp income: IRC §1366.
California parameters: rate schedule R&TC §17041; standard deduction R&TC §17073.5; personal exemption credit R&TC §17054; California S-corp franchise tax R&TC §23802(b), §23153.
The computation is neutral against its inputs. Every federal tax figure is fixed 2026 federal law applied to the prospect's facts (Source 1) and the broker's rate card (Source 2); the engine selects neither. The California personal-income-tax lines apply the latest published FTB schedule pending the late-December release of the 2026 indexed amounts, and the California S-corp franchise tax is added from statute. The discretionary modeling choices are the two disclosed federal assumptions, the 60% reasonable-wage split and the conservative §199A treatment, plus the two flagged California disclosures. Results depend on the inputs shown, and not every profile produces a net benefit. This is an estimate for discussion with the prospect's CPA, not a certified tax opinion. Tax year 2026.