S-corp vs sole proprietor calculator

How the S-corp saving actually works

As a sole proprietor, all your profit is subject to self-employment tax at 15.3%. Elect S-corp status and you split the profit in two: a salary, which carries payroll tax, and a distribution, which does not.

On $120,000 of profit with a $60,000 salary, roughly $55,000 of distribution escapes the 15.3% — worth about $8,400 in tax. That is the entire mechanism, and it is real.

Why it is not free money

Four costs eat into it, and the last one surprises people.

• Real payroll. You become an employee of your own company, with withholding, quarterly filings and W-2s. A payroll service runs $500–$1,500 a year.
• A second tax return. Form 1120-S is due March 15, separate from your personal return, and an accountant will charge $800–$2,000 for it.
• Both halves of FICA on the salary. You pay the employee 7.65% and the employer 7.65%. There is no escaping payroll tax on the salary portion — you have only shrunk the portion it applies to.
• A smaller QBI deduction. Salary is wages, and wages are not qualified business income. Every dollar you move from distribution into salary reduces the 20% deduction. This is the cost nobody mentions, and it can remove a third of the apparent saving.

The reasonable salary problem

You cannot pay yourself $10,000 and distribute $110,000. The salary must be reasonable compensation for the work you actually do, and this is an area the IRS genuinely examines.

There is no formula in the statute. In practice, a salary in the region of 40–60% of profit — and defensibly near market rate for your role — is the range most advisers work within. The aggressive splits promoted online are exactly the ones that attract attention.

The downside is not merely paying the tax you avoided. It is back taxes, penalties and interest, and a reclassification can reach across several years at once.

The inversion above the QBI threshold

Below roughly $201,750 of taxable income (single) or $403,500 (joint), salary reduces your QBI deduction, so it works against you.

Above those thresholds it reverses. The QBI deduction becomes limited to 50% of the W-2 wages your business pays — and as a sole proprietor with no employees, that limit is zero, so the deduction disappears. An S-corp salary is W-2 wages, so paying yourself more can increase the deduction.

This calculator models that inversion, which is why the saving does not move smoothly as you drag the salary slider at higher profits. It is also why the answer genuinely differs between someone earning $90,000 and someone earning $300,000, and why generic advice is unreliable here.

If you also have a salaried job

This is the one case where the comparison above can point the wrong way entirely, so it is worth its own section rather than a footnote.

Social Security tax stops at $184,500 of earnings per person, and your salary fills that ceiling before your business touches it. If your job already pays more than the base, your business profit is already escaping the 12.4% — as a plain sole proprietor, with no election, no payroll and no compliance cost.

On $60,000 of profit with a $190,000 salary, sole-proprietor self-employment tax is about $2,016, not the $8,478 it would be with no other job. Almost all of the saving an S corp is supposed to deliver has already happened.

Worse, electing makes the company pay employer Social Security on your salary. The employee half of over-the-base withholding comes back to you as an excess-Social-Security credit on your return; the employer half never does. In that example the corporation loses about $1,488 that simply evaporates, against roughly $991 of Medicare avoided on the distribution — a net loss before a penny of compliance cost.

The calculator does not model this, because doing it properly needs the excess-credit mechanics and a half-right version would be worse than none. Tick the box under “other household income” and it will tell you the comparison does not apply to you. The rule of thumb: if a job already covers the Social Security base, an S-corp election on side-business profit is usually a cost, not a saving.

What this does not include

• Your own outside salary — see the section above. It can reverse the answer, which is why it is not just a bullet here.
• State treatment. Several states tax S corps regardless of the federal election — California charges a 1.5% franchise tax on S-corp net income, minimum $800. That can erase the saving entirely at lower profits.
• Retirement contributions, which work differently under an S corp and can shift the comparison meaningfully at higher incomes.
• Health insurance, which an S corp handles through the salary in a specific way.
• Your time. Payroll deadlines are real work, and missing them carries its own penalties.

The honest summary

Below about $80,000 of profit, the compliance cost usually exceeds the saving. Between $80,000 and $150,000 it typically pays, often by several thousand a year. Above that it almost always does, though the Social Security wage base caps part of the benefit — profit above it only avoids the 2.9% Medicare portion rather than the full 15.3%.

Use this to decide whether the conversation is worth having. Then have it with an accountant who can model your state, your retirement plans and a defensible salary — because those three between them can move the answer by thousands in either direction.