💰 S-Corp Tax Savings Calculator
An S-corp election splits profit into salary (payroll tax) and distributions (no SE tax). See your potential annual savings.
How S-Corp Taxation Saves Money
As an LLC, every dollar of profit pays 15.3% self-employment tax. As an S-corp, you pay yourself a reasonable W-2 salary (payroll tax applies) and take the rest as distributions — which skip SE tax entirely. The spread is your savings.
The Formula
The catch: the IRS requires a reasonable salary for your role and industry — you cannot pay yourself $0. And S-corps add payroll processing, a separate tax return (Form 1120-S), and bookkeeping, typically $1,500–$3,000/year. The election usually makes sense around $60,000–$80,000 in profit and up.
Worked Example
$150,000 profit, $70,000 salary. LLC SE tax on $150,000 ≈ $21,194. S-corp payroll tax (15.3% employer+employee share) on $70,000 ≈ $10,710. Gross savings = $21,194 − $10,710 = $10,484; minus $2,000 admin costs = $8,484 net annual savings — every year the election stays in place.
Official reference: IRS.gov. This is an estimate for planning only — not tax advice. Verify with a CPA or tax professional before filing.
The Reasonable-Salary Tripwire
The IRS requires S-corp owners to pay themselves a "reasonable salary" before taking distributions — this is the #1 audit trigger for small S-corps. Research salary benchmarks for your role and region (BLS data, job postings) and document your reasoning; $30,000 salary on $300,000 profit invites trouble, while 50–60% of profit as salary is a common defensible zone. Weigh the real costs: payroll service (~$50–$100/month), unemployment insurance, workers' comp, and a business tax return (1120-S, ~$800–$2,000 from a CPA) — total overhead often $1,500–$3,000/year. The election rarely pays below ~$40,000 profit. Also note the QBI interplay: S-corp distributions don't count as qualified business income, so the 20% QBI deduction applies to a smaller base — the net savings calculation must include that offset, which this calculator does.
Frequently Asked Questions (FAQs)
When should I elect S-corp taxation?
Common rule of thumb: consistent net profit above $60k–$80k. Below that, payroll and compliance costs often erase the SE tax savings. File Form 2553 by March 15 for the election to apply to the current year.
What is a reasonable salary for an S-corp owner?
What you would pay an unrelated employee for the same work — check Bureau of Labor Statistics or industry salary data for your role and metro. Too-low salaries are a classic IRS audit trigger.
Do S-corp distributions avoid all tax?
No — distributions avoid Social Security/Medicare tax but are still subject to income tax on your personal return. Only the 15.3% payroll/SE layer is saved.
What are the downsides of an S-corp?
Payroll tax filings, Form 1120-S, stricter bookkeeping, required shareholder meetings/minutes, and less flexibility on health insurance deductions and retirement plan contributions for >2% owners.
Can I switch back from S-corp to LLC taxation?
Yes, by revoking the election, but you generally must wait 5 years before re-electing S status. Talk to a CPA before switching.
Last updated: September 2026