LLC vs S Corp Tax Savings Calculator
Calculate the tax savings from electing S Corp taxation for your LLC or sole proprietorship. Includes reasonable salary considerations.
LLC vs S Corp Tax Guide
The Self-Employment Tax Problem
Sole proprietors and single-member LLCs pay 15.3% self-employment tax on ALL net business income (up to Social Security wage base $176,100 in 2025, then 2.9% Medicare with no cap, plus 0.9% additional Medicare over $200k single/$250k MFJ). This is on TOP of federal and state income tax. A freelancer netting $120,000 pays roughly $16,950 in SE tax alone — before any income tax. S Corp taxation solves this by treating only your 'reasonable salary' as employment income (subject to FICA), with remai
The Reasonable Salary Requirement
IRS requires S Corp owner-employees to take a 'reasonable salary' — what you'd pay someone else to do your work. Set salary too low and the IRS will reclassify distributions as wages, owing back taxes, penalties, interest. Guidelines: industry benchmarks (BLS occupational data), local market rates, your specific role (CEO of one-person consultancy is different from rank-and-file work). Common ratios: 40-60% of net business income as salary for service businesses; 30-50% for product/sales busines
When S Corp Election Makes Sense
Generally worthwhile above $50,000-70,000 net business income. Quick math: $120k net income, $70k reasonable salary. SE tax as sole prop: $120,000 × 0.9235 × 0.153 = $16,952. As S Corp: $70,000 × 0.0765 (employee FICA) + $70,000 × 0.0765 (employer FICA) = $10,710. SE tax saving: $6,242/year. Subtract compliance costs (~$2,000 = payroll service $800 + extra tax prep $1,200) = net saving $4,242/year. Stack annually = compound savings. Below $50k income, compliance costs eat the savings. Above $200
S Corp Compliance Burden (the Costs)
Electing S Corp adds real overhead: (1) Form 2553 election (one-time, before March 15 of effective year). (2) Quarterly payroll filings — federal 941, state withholding, unemployment. Must use payroll service (Gusto, ADP, OnPay $40-100/month) — DIY is risky. (3) Form W-2 issued to yourself annually. (4) Form 1120-S corporate tax return separate from personal — typically $800-2,000 from CPA. (5) State filings — some states (CA, NY, IL) have S Corp surcharges. California is brutal: $800 annual fra
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