S-Corp vs LLC Tax Savings Calculator

The savings equation has exactly three terms, and only one of them grows with your income:

• The distribution. Profit above your salary escapes the 15.3%. This scales with income — the bigger the gap between profit and a defensible salary, the bigger the saving.
• The salary. It carries the same 15.3% as SE tax did, split into an employee half withheld from your paycheck and an employer half paid by the company. Nothing is saved here.
• The overhead.Payroll, the 1120-S, and bookkeeping cost roughly the same whether you earn $50,000 or $500,000. It's a fixed toll on the entrance.

Because the toll is fixed and the benefit is proportional, there is always a crossover income. At a 60% salary split and $2,000 of overhead, the election turns positive just past $41,000of net profit — but "positive" is doing a lot of work there. At $50,000 it nets you about $475 a year, which is not worth standing up a payroll system for. By $100,000 it's roughly $2,900, and by $150,000 about $5,400. Raise the overhead to $3,000 and the crossover moves to $61,000. That sensitivity is the real answer to "what's the magic number?"

Two conditions matter as much as the number. The profit should be stable— an election you revoke after one good year generally can't be re-elected for five years without IRS consent. And a defensible salary well below your profit has to exist; a solo consultant billing $150,000 for their own labor cannot honestly call $40,000 of that a market wage.

One trap the calculator makes visible: past the Social Security wage base, SE tax on additional profit drops from 15.3% to 2.9% (plus 0.9% above $200,000). The savings curve flattens hard up there, because Social Security tax is what you were mostly avoiding. See how self-employment tax is calculated for the wage-base mechanics.

Every dollar you move from salary to distribution saves 15.3 cents and adds a little audit risk. That tension is the whole game, and the IRS refuses to referee it with a formula. The statute says an S-corp shareholder who performs services must be paid reasonable compensation, and the standard is what you'd have to pay a stranger with your skills to do your job.

In practice the IRS and the courts weigh a familiar set of factors:

• Your training, experience, and qualifications
• Your duties, responsibilities, and the time you actually devote to the business
• What comparable businesses pay for comparable services in your market
• What the company pays employees who aren't shareholders
• The company's history of distributions versus wage payments
• Any compensation agreement, and the formula behind it

The rules of thumb you'll hear — 60/40, or a 50/50 split — are planning shorthand, not authority. They're useful for a first pass and useless as a defense. What actually defends a number is documentation: a salary survey for your role and metro, a written note of how you arrived at the figure, and a salary that moves when the business or your role changes.

One structural point worth internalizing: a lower salary shrinks the earnings record that determines your eventual Social Security benefit, and caps how much you can contribute to a solo 401(k), since S-corp retirement contributions key off W-2 wages. Aggressive salary minimization borrows from your future self.

The election converts you into an employer, and employers have obligations that a Schedule C filer never encounters. Budget $1,500–$3,000 a year for a single-owner business, made up of:

• Payroll service. Someone has to run an actual paycheck, withhold income tax and FICA, remit the deposits on schedule, file quarterly Form 941s, and issue your W-2 and W-3 in January. Missed payroll deposits carry their own penalty regime, which is why almost nobody does this by hand.
• Form 1120-S preparation. The corporate return with its Schedule K-1, due March 15 rather than April 15, and usually the largest single line in the budget. A late 1120-S is penalized per shareholder per month even when no tax is owed.
• Bookkeeping. An S-corp needs a real balance sheet — basis, contributions, distributions, accountable-plan reimbursements. Commingling personal and business money stops being sloppy and starts being a problem.
• Unemployment taxes.Federal unemployment tax runs 0.6% on the first $7,000 of wages after the standard state credit — about $42 — plus your state's unemployment tax and its registration paperwork.
• State-level costs.Many states impose a franchise tax, an entity-level fee, or their own S-corp return. A few don't recognize the federal election at all. Check yours before you file Form 2553.

Then there's the cost that never appears on an invoice: every payroll run, every 941, and every deposit deadline is yours to miss. Plenty of owners with $70,000 of profit make the election, spend a weekend a year on compliance, and net a few hundred dollars. That is a bad trade, and it's the reason the honest answer to "should I elect S-corp?" is usually "not yet."

Note also that business deductions do not change with the election. The same home office, mileage, software, and equipment write-offs are available either way — they simply move from Schedule C to Form 1120-S. Deductions still cut both income tax and payroll tax, since they reduce profit before either is computed; the deduction estimator shows what yours are worth. Cutting profit by $10,000 is worth more than most salary-splitting maneuvers, and it's free.

The headline saving is real, but three things claw some of it back, and a comparison that ignores them oversells the election.

• The QBI deduction shrinks. The 20% qualified business income deduction applies to your distribution but not to your W-2 salary. Shifting profit into salary shrinks the deduction, which raises income tax and offsets part of the payroll saving.
• Income tax doesn't move much. Salary and distribution are both ordinary income — distributions are not qualified dividends. The election is a payroll-tax play, full stop. The distinction between the two taxes is laid out in SE tax vs. income tax.
• Social Security credits shrink. Benefits are computed from your highest 35 years of earnings. Paying yourself less wage income today means a smaller check later.

None of this makes the election wrong at $150,000 of profit. It does mean the true saving is somewhat below the payroll-tax figure above, and that anyone quoting you a five-figure saving on $90,000 of profit is selling something.

You file Form 2553, signed by every owner. To take effect for the current tax year it's generally due no later than two months and fifteen days after that year begins — March 15 for a calendar-year business. File later and the election normally takes effect the following January, though the IRS grants relief for late elections in many cases where there's reasonable cause.

Eligibility is narrow but rarely binding on a small business: 100 shareholders or fewer, all of them individuals who are U.S. citizens or residents (no corporations or partnerships as owners), and one class of stock. Your LLC keeps its state-law identity — the operating agreement, the liability shield, the registered agent all continue unchanged.

Before you file, price it. Get an actual quote for payroll plus the 1120-S, put that number into the overhead field above, then set the salary to a figure you could defend with a salary survey rather than the one that maximizes the result. If the answer is still comfortably positive, the election is worth the paperwork. If it's within a few hundred dollars, it isn't.