$
Sole Proprietor
Income
$120,000
SE tax (15.3%)
$16,955
Admin cost
$0
S-Corporation
Salary (60%)
Subject to FICA
$72,000
SE tax (FICA on salary)
$11,016
Admin cost (payroll, etc.)
$2,000
S-Corp election saves you money
Estimated $3,939/year in net savings (after the $2,000/yr admin cost). Gross SE tax savings: $5,939.
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Walkthrough
How the S-Corp election saves SE tax
As a sole proprietor or single-member LLC, your entire net business income is subject to self-employment tax: 12.4% Social Security (capped at the $176,100 wage base) + 2.9% Medicare = 15.3%. This is on top of regular income tax.
With an S-Corp election (Form 2553), you split your business income two ways:
- Reasonable salary — taxed as W-2 wages, FICA tax of 15.3% applies (split between you and the company, but you pay both halves).
- Distributions — pass through to your personal return, taxed as ordinary income but not subject to FICA. This is where the savings come from.
The IRS requires the salary to be "reasonable" — too low is the most common S-corp audit trigger. A common (but non-binding) heuristic is 40–60% of net business income, depending on what you'd pay an outside hire for your role. This calculator uses 60% as a defensible default.
What S-Corp election actually costs
- Payroll service: $1,000–$2,500/year (Gusto, OnPay, ADP, etc. — required to run yourself a real W-2)
- Tax return: $300–$800 for Form 1120-S preparation (more complex than Schedule C)
- State minimum tax: $800/yr in California, less in most other states; some states have a separate S-corp income tax (e.g. NY, MA)
- Bookkeeping: Time or money to keep clean books separating salary from distributions
- Cannot be undone for 5 years — once revoked, the IRS won't let you re-elect for 5 tax years
Questions
Frequently asked questions
When does electing S-Corp tax status start saving money?▾
The S-corp election starts paying for itself once your net self-employment income is roughly $80,000–$90,000 a year. Below that, the ~$2,000/year in payroll and admin costs eats most of the self-employment tax savings. The exact breakeven depends on what 'reasonable salary' is defensible for your role — see the calculator above.
What's the difference between S-Corp and LLC for taxes?▾
An LLC by default is taxed as a sole proprietorship (single-member) or partnership (multi-member) — same Schedule C / SE tax as having no LLC at all. S-Corp is a tax election (Form 2553) you can make on top of an LLC, splitting your business income into a salary (subject to FICA) and distributions (no FICA). Liability protection comes from the LLC structure; tax savings come from the S-corp election.
How do I determine a 'reasonable salary' for S-Corp?▾
The IRS requires you to pay yourself a reasonable salary for the actual work you perform. A common heuristic: pay yourself what you'd pay an outside hire to do your job in your geography, often 40–60% of net business income. Going too low is the biggest S-corp audit trigger. Use industry comp surveys or RC Reports for documentation.
What does S-Corp election cost in admin and payroll?▾
Typical ongoing costs: $1,000–$2,500/year for payroll service (Gusto, ADP, OnPay), $300–$800 for tax return preparation (Form 1120-S is more complex than Schedule C), state franchise/minimum taxes ($800/yr in California, less elsewhere), and 30 minutes to a few hours of your own time monthly for payroll runs. Filing the election itself (Form 2553) is free.
Can I undo an S-Corp election if it doesn't work out?▾
Yes, but it's painful. You file Form 2553 to revoke; the revocation is generally only effective at year-end and the IRS won't let you re-elect for 5 years. So treat the decision as semi-permanent — only elect when income comfortably exceeds the breakeven and you're committed to the admin overhead.
Does the S-Corp election affect my QBI deduction?▾
Yes. The 20% Qualified Business Income (QBI) deduction applies to your distributions but NOT to the salary portion. So electing S-corp slightly reduces your QBI deduction (since less of your income is QBI). The SE tax savings usually outweigh this, but it tightens above the income thresholds where QBI is limited.
See your full tax picture
S-Corp election is one of many tax levers. Run the full optimizer to see all your savings opportunities at once — retirement contributions, deductions, entity choice, and more.
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