S-Corp vs LLC Tax Savings Calculator

Electing S-corp status lets you split business income into W-2 salary (subject to FICA) and distributions (not). That split is the core of the tax savings. But the math only works above a certain profit level — and only if your salary is truly defensible as "reasonable compensation." This calculator shows exactly where you stand in 2026.

How S-Corp Election Saves FICA Taxes

As an LLC or sole proprietor, 100% of your net profit is treated as self-employment (SE) income. You pay SE tax — the self-employed person's version of FICA — of 15.3% on the first $184,500 (2026 SS wage base¹) and 2.9% on everything above that. That's both the employer and employee sides, since you wear both hats.

When you elect S-corp status, your business income is split:

• W-2 salary: FICA applies — same 15.3% to the wage base, 2.9% above. You still pay both sides (employer + employee), but only on the salary portion.
• Distributions: The remainder, taken as a K-1 distribution, is completely exempt from FICA. No Social Security tax. No Medicare tax. That's the savings.

The Additional Medicare Tax angle

There's a further savings at higher incomes: the 0.9% Additional Medicare Tax² applies to earned income above $200,000 (single) or $250,000 (MFJ). For an S-corp owner with a salary below the threshold, the distribution portion escapes this surcharge entirely. An LLC owner with the same total income would owe 0.9% on every dollar of SE earnings above the threshold.

Reasonable Compensation: The Key Variable

The IRS requires S-corp shareholder-employees to pay themselves a salary "reasonable" for the services they perform before taking distributions³. This is the most contested variable in S-corp planning — set it too low and you're a reclassification target; set it too high and you give back the savings.

A practical starting point: if your business provides professional services (consulting, law, medicine, trades), your salary should reflect market-rate compensation for a fully employed person doing that work. For most single-owner service businesses, that's $60,000–$180,000 depending on industry and the owner's role.

Red flags the IRS looks for: zero salary, a salary that's only a tiny fraction of S-corp profit (e.g., $30K salary on $600K of distributions), or a ratio that drifts lower each year as profit grows. Courts have consistently upheld IRS reclassification in these cases — with back FICA, penalties, and interest.

S-Corp Setup and Ongoing Overhead

S-corp election isn't free. You'll incur costs that reduce your net savings:

Total ongoing overhead typically runs $1,200–$3,000/yr. Your break-even is the profit level where FICA savings exceed this overhead — generally somewhere around $40,000–$70,000 of net profit for service businesses, depending on the reasonable salary required for your role.

When S-Corp Election Doesn't Make Sense

• Net profit under ~$50K. The overhead erodes or exceeds savings. Stick with a Solo 401(k) as an LLC instead.
• Planning to issue QSBS stock. Section 1202 qualified small business stock (up to $15M federal tax-free gain, post-OBBBA) requires a C-corp. Once you've elected S-corp, that clock stops — and recapturing C-corp status resets the QSBS holding period.
• Expecting outside equity investors. S-corps cannot have more than 100 shareholders, cannot have non-resident alien shareholders, and cannot have more than one class of stock. VC-backed companies are almost always C-corps.
• High employee count with benefit plans. S-corp restrictions on owner employee benefits (health insurance, HRAs) can create compliance complexity that reduces the after-tax benefit.
• Multi-state operations. Each additional state may require a separate S-corp filing, franchise tax, or payroll registration — compounding the overhead.

Common S-Corp Mistakes

• Setting up S-corp and then not running payroll. Distributions without a W-2 salary is exactly what triggers IRS reclassification. You must actually run payroll.
• Electing too early. At $80K profit, the savings are real but modest. At $200K+, they're compelling. The rush to elect S-corp at startup often just adds complexity before it pays off.
• Not adjusting salary as profit grows. A salary set at $75K when you netted $150K may be too low if profit climbs to $500K. Reasonable comp scales with the business.
• Forgetting quarterly estimated taxes and payroll deposits. S-corp payroll generates federal payroll tax deposits (940/941 filings). Missing them triggers penalties.
• Missing the Section 199A QBI deduction optimization. S-corp W-2 wages paid to yourself count toward the W-2 wage limitation for the 20% QBI deduction — which phases out for specified service businesses above ~$394,600 MFJ (2026, per OBBBA-widened phaseout range). A specialist advisor will model the interaction.

1. SSA 2026 COLA Fact Sheet — confirms $184,500 Social Security wage base for 2026.
2. IRS Topic 751: Social Security and Medicare Withholding Rates — FICA and Additional Medicare Tax rates.
3. IRS: S Corporation Compensation and Medical Insurance Issues — reasonable compensation requirements for shareholder-employees.
4. IRS: S Corporations — eligibility, election, and structural requirements.

Tax values verified as of April 2026. 2026 SS wage base: $184,500 (SSA). SE tax rate: 15.3% to wage base / 2.9% above. Additional Medicare Tax threshold: $200,000 single / $250,000 MFJ (unchanged since ACA enactment, not indexed for inflation).