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S-Corp Tax Savings Calculator

Estimate how much you could save on self-employment taxes by switching from a Sole Proprietorship to an S-Corp.

Estimated Annual Savings: $0

Sole Prop SE Tax $0
S-Corp Payroll Tax $0

*Calculation assumes a 15.3% self-employment tax rate applied to 92.35% of net earnings.

function calculateSavings() { var netProfit = parseFloat(document.getElementById('netProfit').value); var salary = parseFloat(document.getElementById('reasonableSalary').value); if (isNaN(netProfit) || isNaN(salary)) { alert("Please enter valid numerical values."); return; } if (salary > netProfit) { alert("Reasonable salary cannot exceed net profit."); return; } // Sole Proprietorship Tax Logic // 15.3% on 92.35% of profit var solePropTax = (netProfit * 0.9235) * 0.153; // S-Corp Tax Logic // You only pay SE taxes (FICA) on the salary portion, not the distributions var scorpTax = (salary * 0.9235) * 0.153; var totalSavings = solePropTax – scorpTax; if (totalSavings < 0) totalSavings = 0; document.getElementById('solePropTax').innerHTML = '$' + solePropTax.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('scorpTax').innerHTML = '$' + scorpTax.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('finalSavings').innerHTML = '$' + totalSavings.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('resultsArea').style.display = 'block'; }

How an S-Corp Can Slash Your Freelance Taxes

If you are a high-earning freelancer or small business owner, you are likely feeling the sting of the 15.3% self-employment tax. For a Sole Proprietorship or a standard single-member LLC, the IRS views your entire net profit as "earned income," making every dollar subject to Social Security and Medicare taxes.

The S-Corp Strategy Explained

By electing S-Corporation status with the IRS, you change how your income is classified. You become an employee of your own corporation. You are required to pay yourself a "reasonable salary," which is subject to payroll taxes. However, the remaining profit can be taken as a "shareholder distribution," which is not subject to the 15.3% self-employment tax.

What is "Reasonable Compensation"?

The IRS requires that S-Corp owners pay themselves a salary that matches what they would earn working for someone else in a similar role. If you earn $150,000 in profit but only pay yourself a $20,000 salary to avoid taxes, the IRS may reclassify your distributions and issue penalties. Common factors for determining salary include:

  • Years of experience and specialized training.
  • Regional salary averages for your job title.
  • The complexity of the business operations.
  • Time and effort devoted to the business.

Real-World Example

Let's look at a freelance software consultant earning $120,000 in net profit annually:

  • As a Sole Proprietor: The entire $120,000 (adjusted by 0.9235) is taxed at 15.3%.
    Total SE Tax: ~$16,955
  • As an S-Corp: The owner sets a reasonable salary of $65,000. Only that $65,000 is taxed at 15.3%. The remaining $55,000 is taken as a distribution.
    Total SE Tax: ~$9,188

In this scenario, the business owner saves approximately $7,767 per year in taxes alone. While S-Corps involve additional costs like payroll processing and separate tax filings, the tax savings often far outweigh the administrative overhead once your net profit exceeds $60,000 to $75,000.

When Should You Make the Switch?

Most tax professionals suggest that the "sweet spot" for S-Corp election is when your business consistently generates at least $60,000 in annual net profit. Use the calculator above to input your specific numbers and see if the switch is right for your financial situation.

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