S-Corp Tax Savings Calculator (2026)

As a sole proprietor or single-member LLC, you pay 15.3% self-employment (SE) tax on 92.35% of your entire net business profit. This is the combined Social Security (12.4%) and Medicare (2.9%) tax that funds these federal programs. There is no way to avoid it — every dollar of profit is subject to SE tax.

When you elect S-Corp taxation (by filing IRS Form 2553), the rules change. You must pay yourself a reasonable salary for the work you perform, which is subject to payroll taxes (the same 15.3%, split between employer 7.65% and employee 7.65%). However, any profit remaining after your salary and employer payroll taxes is distributed to you as an S-Corp distribution, which is not subject to payroll or SE tax.

The savings come from distributions. If your S-Corp earns $120,000 and you pay yourself a $60,000 salary, only $60,000 is subject to the 15.3% payroll tax rate, not the full $120,000. The remaining ~$55,410 ($120,000 - $60,000 salary - $4,590 employer FICA) flows to you as a distribution, saving you approximately $8,478 in payroll taxes ($55,410 x 15.3%).

Both arrangements pay the same federal and state income tax on the total profit, so the savings come entirely from the payroll tax reduction. The distributions are still subject to income tax — they just bypass the 15.3% payroll/SE tax.

The IRS requires S-Corp owner-employees to receive "reasonable compensation" for the services they provide before taking distributions. There is no safe harbor percentage, but most CPAs recommend 40-60% of net profit as a starting point. The IRS examines several factors:

• Comparable wages: What would you pay someone to do the same work in your industry and geographic area?
• Training and experience: A 20-year veteran commands higher wages than a beginner.
• Hours worked: Working 60 hours/week justifies a higher salary than 20 hours/week.
• Duties and responsibilities: Complex, specialized work commands higher compensation.
• Business revenue and profit: A business generating $500,000 in profit cannot reasonably pay its sole owner $30,000.

Use resources like the Bureau of Labor Statistics (bls.gov/oes), Salary.com, or Glassdoor to research comparable wages. Document your methodology in case of an audit.

S-Corp is not always the right choice. Here are situations where staying as a sole proprietorship or LLC may be better:

• Net profit below $50,000-$60,000: Compliance costs ($2,000-$3,500/year) eat into or exceed the tax savings at lower income levels.
• Inconsistent income: If your profit fluctuates significantly year to year, S-Corp compliance costs are fixed regardless of whether you have a profitable year.
• Multiple-member LLC: S-Corp election affects all members and adds complexity to profit allocation. Partnership taxation may be more flexible.
• Planning to raise venture capital: Most VCs and investors prefer C-Corp structure (typically Delaware C-Corp). Converting from S-Corp to C-Corp has tax implications.
• High-income specified service trades: Doctors, lawyers, consultants, and other specified service trades face QBI deduction phase-outs above $191,950 (single)/$383,900 (MFJ), which can reduce S-Corp benefits.
• You want to maximize Social Security benefits: Lower salary means lower Social Security credits, which may reduce future retirement benefits. This trade-off is worth considering if you are far from the 35-year earnings history needed for maximum benefits.