$
Enter your net business profit$
Enter your reasonable salary
IRS requires a market-rate salary for your role
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Payroll, accountant, state fees (~$1,500–$5,000/yr)
Estimated Annual Tax Savings
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⚠️ Tax Disclaimer: This calculator provides estimates for educational purposes only and does not constitute tax advice. Actual tax savings vary based on state taxes, deductions, specific business structure, and IRS guidance on reasonable compensation. Consult a CPA or tax attorney before making S-Corp election decisions.
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How S-Corp Tax Savings Work
As a sole proprietor or single-member LLC, you pay 15.3% self-employment tax (SE tax) on 92.35% of all net profits — this covers Social Security and Medicare. The key insight: as an S-Corp owner, you only pay SE tax (as payroll taxes) on your W-2 salary. Profits distributed above your salary are not subject to SE tax, saving 15.3% on the distribution amount.
S-Corp Tax Savings Formula
SE Tax Savings = (Net Profit − W-2 Salary) × 15.3%
Sole Prop SE Tax = Net Profit × 0.9235 × 15.3%
S-Corp SE Tax = W-2 Salary × 15.3% (split employer/employee)
Net Savings = Sole Prop SE Tax − S-Corp SE Tax − Annual S-Corp Overhead
Example: $120,000 profit, $70,000 salary, $2,500 overhead:
Sole Prop SE = $120,000 × 0.9235 × 15.3% = $16,945
S-Corp SE = $70,000 × 15.3% = $10,710
Net Savings = $16,945 − $10,710 − $2,500 = $3,735/year
S-Corp SE Tax = W-2 Salary × 15.3% (split employer/employee)
Net Savings = Sole Prop SE Tax − S-Corp SE Tax − Annual S-Corp Overhead
Example: $120,000 profit, $70,000 salary, $2,500 overhead:
Sole Prop SE = $120,000 × 0.9235 × 15.3% = $16,945
S-Corp SE = $70,000 × 15.3% = $10,710
Net Savings = $16,945 − $10,710 − $2,500 = $3,735/year
When S-Corp Makes Financial Sense
- Net profit > $50,000/yr: S-Corp typically starts saving money at this threshold
- Net profit $80,000–$200,000+: Sweet spot — savings often $5,000–$20,000/yr
- High-profit businesses ($200,000+): Savings plateau as salary approaches SS wage base ($168,600 in 2024)
S-Corp Annual Costs to Factor In
- Payroll processing: $500–$2,000/yr (Gusto, ADP, etc.)
- CPA for separate S-Corp return (Form 1120-S): $800–$2,500/yr
- State annual fees: $50–$800/yr (varies by state)
- Registered agent: $50–$300/yr
💡 Important: The IRS scrutinizes S-Corp salaries closely. Paying yourself $1/yr to avoid all SE tax is a red flag — the IRS can reclassify distributions as wages and assess back taxes, penalties, and interest. Work with a CPA to set a defensible reasonable compensation figure.
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Frequently Asked Questions
How does an S-Corp save on taxes?
As a sole proprietor or single-member LLC, you pay 15.3% self-employment tax on all net profits. With an S-Corp, you only pay payroll taxes on your W-2 salary. Distributions above your salary are not subject to self-employment tax, potentially saving thousands annually.
When does an S-Corp make sense?
S-Corp election typically makes financial sense when your business profits exceed $40,000–$50,000 per year. Below that threshold, the cost of running an S-Corp often exceeds the tax savings. Many CPAs recommend S-Corp election at $50,000+ in net profit.
What is a reasonable salary for S-Corp?
The IRS requires S-Corp owner-employees to pay themselves a reasonable salary comparable to what you would pay someone else to do the same work. Most advisors recommend paying at least 40–60% of net profit as salary, or researching industry salary benchmarks for your role.
What are the costs of running an S-Corp?
S-Corp costs include: payroll processing ($500–$2,000/yr), CPA for separate S-Corp return ($800–$2,500/yr), state filing fees ($50–$800/yr), and registered agent ($50–$300/yr). Total annual overhead is typically $1,500–$5,000+.
Can an LLC be taxed as an S-Corp?
Yes. An LLC can elect S-Corp tax treatment by filing Form 2553 with the IRS. The LLC keeps its legal structure but is taxed as an S-Corp. This is a very common structure — it combines the legal simplicity of an LLC with the tax advantages of an S-Corp.