S-Corp Tax Savings Calculator
Estimate how much you could save by switching from a Sole Proprietorship to an S-Corporation.
How S-Corp Tax Savings Work
When you operate as a Sole Proprietor or a standard LLC, the IRS views all your business profits as personal income subject to Self-Employment (SE) tax. This tax currently sits at 15.3%, covering both the employer and employee portions of Social Security and Medicare.
By electing S-Corp status, you become an employee of your own corporation. You pay yourself a "reasonable salary," and only that salary is subject to FICA taxes (15.3%). The remaining profit is distributed as a dividend, which is not subject to self-employment tax. This is the "S-Corp loophole" that allows business owners to save thousands every year.
The "Reasonable Salary" Rule
The IRS requires S-Corp owners to pay themselves a salary that matches what someone in a similar role would earn at a different company. If your salary is too low, you risk an audit. Generally, business owners aim for a salary that is 40% to 60% of their total business profit, depending on the industry and workload.
Example Calculation
Imagine your business nets $100,000 in profit:
- As a Sole Proprietor: You pay 15.3% on roughly 92.35% of that $100,000, totaling about $14,130 in SE taxes.
- As an S-Corp: You pay yourself a $50,000 salary. You only pay the 15.3% tax on that $50,000, which is $7,650.
- The Result: You save $6,480 in taxes. Even after paying $1,500 for payroll software and filing fees, you are still ahead by nearly $5,000.
When Should You Switch?
Most tax professionals suggest that the "tipping point" for an S-Corp election is when your business consistently nets at least $60,000 to $70,000 in profit. Below this level, the administrative costs of running payroll and filing corporate tax returns (Form 1120-S) often outweigh the tax savings.