How it works
The S-corp election exists to answer one question: how much of your business profit can you take as a distribution rather than a salary, and what does that save in payroll tax? As a sole proprietor every dollar of profit carries the full 15.3% self-employment tax. In an S-corp, only the salary you pay yourself is hit with payroll tax; the distribution above it is not. This calculator estimates the saving by comparing the two: the self-employment tax you would pay as a sole proprietor on the whole profit, against the payroll tax on just the salary. On $120,000 of profit with a $60,000 salary, that is the difference between 15.3% on everything and 15.3% on half — a saving in the region of $8,000. The catch is the word 'reasonable'. The IRS requires an owner who works in the business to take a reasonable salary before any distribution, and setting it artificially low to widen the split is the single most common S-corp audit trigger. The tool also flags the honest arithmetic: an S-corp adds real running costs — payroll processing, a separate Form 1120-S return, sometimes a state franchise tax — so the saving has to clear those before the election pays. Treat the figure as an upper bound, simplified of the wage base and additional Medicare tax.
Formula
Saving = SE tax on full profit - payroll tax on salary only
Tips
- Only the salary carries payroll tax; the distribution above it does not.
- The IRS requires a reasonable salary — setting it too low is the top S-corp audit trigger.
- Subtract real S-corp costs: payroll processing and the 1120-S return.
- The saving must clear the added admin cost before the election pays.
- This is a simplified upper bound — wage base and extra Medicare tax are ignored.
Frequently asked questions
- How does an S-corp save on taxes?
- By splitting profit between salary and distributions. Only the salary carries the 15.3% payroll tax; the distribution above it does not. On $120,000 of profit with a $60,000 salary, that halves the taxed portion and saves roughly $8,000.
- What is a reasonable salary for an S-corp owner?
- What comparable businesses pay for the same work — the IRS requires an owner who works in the business to take a reasonable salary before any distribution. Setting it artificially low to dodge payroll tax is the most common S-corp audit trigger.
- When is an S-corp election worth it?
- When the payroll-tax saving clears the added running costs — payroll processing, a separate Form 1120-S return, and sometimes a state franchise or minimum tax. Below roughly $40,000-60,000 of profit the admin often eats the benefit; above it the case strengthens.
- What are the downsides of an S-corp?
- Real costs and complexity: running payroll, filing a separate business return (Form 1120-S), possible state franchise taxes, and the discipline of a defensible salary. The election saves payroll tax but adds administrative burden that has to be paid for.
- Is the S-corp saving guaranteed?
- No — and this calculator shows an upper bound, simplified of the Social Security wage base and the 0.9% additional Medicare tax. The actual saving depends on your salary level, state rules and running costs. Confirm the details with a tax professional before electing.