$
That assumes a salary of 60% of net profit (capped at the $184,500 Social Security wage base), $2,500 a year for payroll and the extra business return, a single filer with no other income taking the $16,100 standard deduction, a business that is not a specified service business (consulting, law, health, financial services and the like) and an LLC you already have, so its annual fee is paid either way. It counts federal payroll tax and federal income tax (including the QBI deduction the salary changes). Your own state income tax is not in it.
Sole Proprietor
Income
$120,000
SE tax (15.3%)
$16,955
QBI deduction
$19,084
Federal income tax
$11,506
Admin cost
$0
S-Corporation
Salary (60% of profit)
Subject to FICA
$72,000
FICA on salary (both halves)
$11,016
QBI deduction (the salary is not part of it)
$7,998
Federal income tax
$14,049
Admin cost (payroll + 1120-S return)
$2,500
S-Corp election saves you money
At $120,000 of net profit, electing S-corp saves about $897 a year. It saves $5,939 of payroll tax, against $2,500 of overhead and $2,542 more federal income tax (the salary cuts your QBI deduction from $19,084 to $7,998). At these assumptions, it pays off between $57,263 and $222,474 of net profit, and again from $263,978 — above $222,474, the salary is still paying Social Security tax after a sole proprietor's has stopped at the wage base; from $263,978, the QBI wage limit takes the deduction from a sole proprietor with no payroll, and the salary keeps it.
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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 $184,500 wage base) + 2.9% Medicare = 15.3%, charged on 92.35% of the profit. 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. There is no fixed percentage; the test is what you'd pay an outside hire for your role. This calculator assumes 60% of net profit (capped at the $184,500 Social Security wage base) as a planning default.
What S-Corp election actually costs
- Payroll service: a monthly subscription, every year you hold the election — required to run yourself a real W-2
- Tax return: Form 1120-S preparation, on top of your 1040 (more complex than Schedule C)
- What this calculator assumes for both: $2,500 a year to run payroll and file the extra Form 1120-S return — our own planning estimate, not a quote
- A different QBI deduction: the salary is not qualified business income, so below the QBI threshold the deduction shrinks and your income tax rises; above it, the salary can keep a deduction a sole proprietor with no payroll loses. The figures above count both.
- State entity tax: California taxes an S-corp's net income at 1.5%, with a minimum of $800 a year — but an LLC that elects stops paying the $800 annual LLC tax and the receipts-based LLC fee, so this calculator counts only the difference. Most states charge only a flat annual fee; the ones that tax the S-corp itself are California, Illinois, Tennessee and District of Columbia. Each state's S-corp calculator includes its own cost.
- 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
The savings on this page count federal payroll tax and federal income tax at a 60% salary, for an LLC you already have — see the FAQ for every assumption.
Questions
Frequently asked questions
When does electing S-Corp tax status start saving money?
At this calculator's default assumptions, it pays off between $57,263 and $222,474 of net profit, and again from $263,978 — above $222,474, the salary is still paying Social Security tax after a sole proprietor's has stopped at the wage base; from $263,978, the QBI wage limit takes the deduction from a sole proprietor with no payroll, and the salary keeps it. Below $263,978 of net profit, it never saves more than about $1,934 a year at these assumptions. That assumes a salary of 60% of net profit (capped at the $184,500 Social Security wage base), $2,500 a year for payroll and the extra business return, a single filer with no other income taking the $16,100 standard deduction, a business that is not a specified service business (consulting, law, health, financial services and the like) and an LLC you already have, so its annual fee is paid either way. It counts federal payroll tax and federal income tax (including the QBI deduction the salary changes). Your own state income tax is not in it. A lower defensible salary moves the answer, and so do your own payroll and return quotes.
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. Going too low is the biggest S-corp audit trigger. Use industry comp surveys or RC Reports for documentation. This calculator assumes 60% of net profit (capped at the $184,500 Social Security wage base).
What does S-Corp election cost in admin and payroll?
Four things, three of which recur every year: a payroll service (required to run yourself a real W-2), preparation of Form 1120-S (a separate business return, more complex than Schedule C, filed on top of your 1040), state franchise or entity taxes, and 30 minutes to a few hours of your own time monthly for payroll runs. This calculator assumes $2,500 a year to run payroll and file the extra Form 1120-S return — our own planning estimate, not a quote. California taxes an S-corp's net income at 1.5%, with a minimum of $800 a year — but an LLC that elects stops paying the $800 annual LLC tax and the receipts-based LLC fee, so this calculator counts only the difference. Price the first two for your own situation before you elect — they are the part that decides the breakeven. 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, in both directions, and this calculator counts it. The 20% QBI deduction is figured on qualified business income, and an S-corp owner's salary is not qualified business income — so below the QBI threshold ($201,750 of taxable income for a single filer in 2026), electing shrinks the deduction. At $120,000 of net profit it falls from $19,084 to $7,998, which adds $2,542 of federal income tax. Above the threshold, a business that is not a specified service business is limited by the W-2 wages it pays. A sole proprietor with no payroll pays none and the salary counts — so at $308,500 of net profit, where taxable income clears the top of the phase-in, the deduction is $400 as a sole proprietor and $21,477 as an S-corp. For a specified service business (consulting, law, health, financial services and the like) the deduction phases out for both above the threshold, and it pays off between $57,263 and $222,474 of net profit, and again from $294,655 — above $222,474, the salary is still paying Social Security tax after a sole proprietor's has stopped at the wage base.
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