S-Corp Tax Savings Calculator
Estimate how much you could save on Self-Employment taxes by switching from a Sole Proprietorship to an S-Corporation.
Your Estimated Annual Savings
By electing S-Corp status, you could potentially save:
Sole Proprietor SE Tax: $0.00
S-Corp Payroll Tax (FICA): $0.00
*Estimates based on current 15.3% Self-Employment/FICA tax rates. Does not include S-Corp administrative costs or state-specific taxes.
How S-Corp Tax Savings Work
As a Sole Proprietor or a standard single-member LLC, the IRS views you and your business as one entity. This means you pay Self-Employment tax (15.3%) on 100% of your business profits. This tax covers both the employer and employee portions of Social Security and Medicare.
When you elect S-Corp status, you become an employee of your own corporation. You are required to pay yourself a "reasonable salary." You only pay that 15.3% tax on the salary portion. The remaining profit (the distribution) is only subject to ordinary income tax, effectively "skipping" the 15.3% self-employment tax on a significant portion of your income.
What is a "Reasonable Salary"?
The IRS requires S-Corp owners to pay themselves a salary that matches what someone in a similar position would earn in the open market. If you try to pay yourself a $0 salary to avoid all taxes, the IRS may reclassify your distributions and apply heavy penalties. Typical benchmarks include industry data, your level of experience, and the geographical location of your business.
When Should You Switch?
Generally, tax professionals suggest considering an S-Corp election once your business net profit exceeds $60,000 to $80,000. This is because the tax savings must be high enough to outweigh the additional costs of running an S-Corp, such as:
- Payroll processing fees.
- Accounting and tax preparation for Form 1120-S.
- State-specific franchise taxes or S-Corp fees.
- Unemployment insurance taxes.
Real-World Example
Imagine you earn $100,000 in net profit. As a Sole Proprietor, you owe roughly $15,300 in self-employment taxes. If you switch to an S-Corp and set a reasonable salary of $60,000, you only pay FICA tax on that $60,000 (roughly $9,180). The remaining $40,000 is taken as a distribution, saving you approximately $6,120 in taxes per year.