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.
- LLC: SE tax on $300K × 0.9235 = $276,750 of SE earnings → ~$29,900 in SE tax
- S-corp: FICA on $120K salary only → $18,360 in FICA
- Savings on $180K of distributions: ~$11,540/yr before overhead
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.
- What would you pay a non-owner employee to do your job?
- How much of the business revenue is directly generated by your personal services?
- Industry comp benchmarks (IRS uses BLS, RSMeans, and industry surveys)
- What the S-corp pays other employees for similar work
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:
| Cost Item | Typical Range | Notes |
|---|---|---|
| Payroll service (monthly) | $50–$100/mo ($600–$1,200/yr) | Gusto, ADP, or similar — required to run W-2 payroll |
| Additional corporate tax return (Form 1120-S) | $500–$1,500/yr | Filed in addition to your personal return (Schedule K-1) |
| State S-corp filings (if applicable) | $100–$800/yr | Some states charge an annual franchise/minimum tax on S-corps |
| S-corp election (Form 2553, one-time) | $0 (DIY) – $300 (CPA-filed) | Must be filed within 2.5 months of the tax year you want to elect |
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 $403,500 MFJ / $201,750 single (2026, per IRS Rev. Proc. 2025-32; OBBBA widened phaseout range to $150K MFJ). A specialist advisor will model the interaction.
Related tools and guides
- Retirement Plan Calculator — Solo 401(k) vs SEP-IRA vs Cash Balance for your S-corp income
- Business Exit Value Calculator — estimated proceeds from selling your S-corp vs C-corp
- Financial Planning for Business Owners — full guide covering entity structure, tax, and exit
- Match with a business-owner specialist
S-Corp Election: Frequently Asked Questions
How much can an S-corp election save on taxes?
Savings depend on your profit level and your reasonable salary. On a $300K profit with a $120K salary, you avoid FICA on $180K of distributions — roughly $11,500/year before overhead. At $250K profit with a $100K salary, typical net savings run $7,000–$10,000/year. Over 10 peak earning years, that compounds to $70,000–$100,000 kept out of self-employment tax. Use the calculator above to see your exact numbers with your salary and profit inputs.
What is reasonable compensation for an S-corp owner?
The IRS requires S-corp shareholder-employees to pay themselves a W-2 salary commensurate with what an arm's-length employer would pay for the same services. For most single-owner service businesses, that means $60,000–$180,000 depending on industry and role. The IRS uses a 9-factor test and benchmarks against BLS and industry salary surveys. Courts have upheld reclassification when owners pay token salaries — Watson v. Commissioner (2012) is the key precedent where the IRS successfully reclassified $67K in distributions on a $200K+ CPA practice as wages.
At what profit level does S-corp election make sense?
The general threshold is net profit of $50,000 or more, with meaningful savings starting around $80,000–$100,000. The break-even is where FICA savings exceed annual S-corp overhead (typically $1,200–$3,000/year). For a professional services owner required to pay a $70,000 reasonable salary, that break-even is around $60,000–$70,000 net profit. Below that, overhead erodes the savings and the compliance burden isn't justified.
How does S-corp election affect the Section 199A QBI deduction?
For owners above the 2026 phaseout start — $403,500 MFJ or $201,750 single (IRS Rev. Proc. 2025-32, with OBBBA-widened $150K phaseout range for MFJ) — the 20% QBI deduction is limited by the W-2 wages test: you may deduct the lesser of 20% of QBI or 50% of W-2 wages paid. S-corp owners paying themselves a W-2 salary create wages that satisfy this test. LLC owners with pass-through income but no W-2 wages can lose the QBI deduction entirely above the threshold. For high-income business owners, the S-corp salary structure often preserves tens of thousands in QBI deduction annually.
Can I take S-corp distributions without paying myself a salary?
No. The IRS requires shareholder-employees who provide services to pay themselves reasonable compensation before taking distributions. Distributions with no W-2 salary — or a very low one relative to total income — is a major audit trigger. The IRS can reclassify distributions as wages, creating back FICA, penalties, and interest. Multiple Tax Court cases (Watson v. Commissioner, Fleischer v. Commissioner) have upheld reclassification. The IRS specifically targets zero-salary S-corps as part of its ongoing S-corp compliance initiative.
Does S-corp election affect QSBS (qualified small business stock)?
Yes — and this is critical for founders. Section 1202 QSBS — which can exclude up to $15M of gain from federal capital gains tax (post-OBBBA, for stock issued after July 4, 2025) — requires a C-corporation. If you elect S-corp status, you cannot accumulate QSBS going forward. Converting from C-corp to S-corp also forfeits QSBS protection on existing shares. For owners who expect to sell for $5M+ and haven't yet raised outside capital, staying as a C-corp rather than electing S-corp is often the higher-value choice. See the QSBS guide for the full analysis.
What does running an S-corp cost annually?
Typical ongoing overhead runs $1,200–$3,000/year: a payroll service ($600–$1,200/yr for Gusto or ADP), an additional corporate tax return — Form 1120-S — filed by your CPA ($500–$1,500/yr), and any state S-corp franchise or minimum taxes. The one-time Form 2553 election is free if filed yourself or $200–$300 CPA-filed. This overhead is why S-corp election doesn't make sense below roughly $50,000–$70,000 of net profit — the FICA savings simply don't yet exceed the cost of the structure.
Run the full S-corp analysis for your situation
This calculator gives you the FICA savings. A business-owner specialist will also model the Section 199A QBI interaction, state tax implications, and how the S-corp salary choice affects your retirement plan contributions — because they're connected. Free match, no obligation.
- SSA 2026 COLA Fact Sheet — confirms $184,500 Social Security wage base for 2026.
- IRS Topic 751: Social Security and Medicare Withholding Rates — FICA and Additional Medicare Tax rates.
- IRS: S Corporation Compensation and Medical Insurance Issues — reasonable compensation requirements for shareholder-employees.
- 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).