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S-Corp Tax Savings Calculator
S-Corp Tax Savings Calculator
Compare your tax burden as an LLC vs. S-Corp and see how much you could save by electing S-Corporation status.
What Is an S-Corp Election?
An S-Corporation election is a tax classification choice — not a separate business entity. When you form an LLC, the IRS taxes it as a "disregarded entity" (for single-member LLCs) or a partnership (for multi-member LLCs). All net profits flow through to your personal tax return and are subject to both income tax and self-employment tax at 15.3%.
By filing IRS Form 2553, your LLC can elect to be taxed as an S-Corporation instead. The LLC's legal structure remains unchanged — you still have the liability protection and operational flexibility of an LLC. Only the tax treatment changes.
Under S-Corp taxation, you pay yourself a reasonable salary (subject to payroll taxes), and any remaining profits are distributed to you as shareholder distributions — which are not subject to the 15.3% self-employment tax. This split between salary and distributions is where the tax savings come from.
How S-Corp Tax Savings Work
The savings mechanism is straightforward. With a standard LLC, every dollar of profit is subject to self-employment (SE) tax at 15.3% (12.4% Social Security + 2.9% Medicare) on 92.35% of net earnings. With an S-Corp election, only your salary is subject to payroll taxes — the equivalent of SE tax.
| Tax Component | LLC (Default) | S-Corp Election |
|---|
| Self-Employment / Payroll Tax Base | All net profit | Salary only |
| Social Security Tax (12.4%) | On 92.35% of profit up to $176,100 | On salary up to $176,100 |
| Medicare Tax (2.9%) | On 92.35% of all profit | On salary only |
| Additional Medicare (0.9%) | On earnings over $200K/$250K | On salary over $200K/$250K |
| Federal Income Tax | On net profit after SE deduction | On salary + distributions |
| QBI Deduction (20%) | On qualified business income | On distributions (not salary) |
Example: If your LLC earns $150,000 in net profit and you set a reasonable S-Corp salary of $70,000, you save SE tax on $80,000 of distributions. At 15.3%, that is approximately $12,240 in annual tax savings — minus the additional S-Corp operating costs of roughly $2,000-$4,000 per year.
The "Reasonable Salary" Requirement
The IRS requires that S-Corp owner-employees who perform services for the business must receive reasonable compensation before taking any distributions. There is no fixed percentage or formula — the IRS evaluates several factors:
- Training and experience: What would someone with your qualifications earn as an employee?
- Duties and responsibilities: What is the scope of your role in the business?
- Time and effort devoted: Are you working full-time or part-time?
- Comparable salaries: What do similar positions pay in your industry and geographic area?
- Company profitability: Salary should reflect the business's financial performance.
- Distribution history: Large distributions with minimal salary raises red flags.
Rule of thumb: For most service-based businesses, setting salary at 40-60% of net profits is generally considered reasonable. A salary that is clearly too low (e.g., $20,000 for a consultant earning $200,000) invites IRS scrutiny and potential reclassification of distributions as wages — with penalties and back taxes.
When Does an S-Corp Election Make Sense?
An S-Corp election is not beneficial for every LLC. The additional administrative costs and complexity mean there is a break-even point below which the savings do not justify the expense.
General Guidelines
| Net Profit Range | S-Corp Recommendation | Estimated Annual Savings |
|---|
| Under $40,000 | Not recommended | Savings unlikely after costs |
| $40,000 – $60,000 | Possibly — run the numbers | $500 – $2,500 |
| $60,000 – $100,000 | Usually beneficial | $2,500 – $6,000 |
| $100,000 – $200,000 | Strongly recommended | $5,000 – $15,000 |
| $200,000+ | Almost always beneficial | $10,000 – $25,000+ |
Additional Costs to Consider
- Payroll processing: $30–$100/month for a payroll service (Gusto, ADP, QuickBooks Payroll)
- Additional tax preparation: Form 1120-S filing costs $500–$1,500 more than a Schedule C
- State fees: Some states charge additional S-Corp franchise taxes or fees (e.g., California's $800 minimum franchise tax applies regardless)
- Workers' compensation: Some states require coverage even for owner-employees
- Bookkeeping: S-Corps require more meticulous record-keeping for payroll and distributions
S-Corp Filing Requirements
Electing S-Corp status adds several compliance obligations beyond what a standard LLC requires:
- Form 2553: File with the IRS to elect S-Corp status. Due by March 15 of the tax year (or within 75 days of formation for new businesses).
- Form 1120-S: Annual S-Corp tax return, due March 15 each year. This is an informational return — the S-Corp itself does not pay federal income tax.
- Schedule K-1: Issued to each shareholder showing their share of income, deductions, and credits. Used to prepare the individual return.
- Payroll tax filings: Quarterly Form 941 (federal) and state equivalents. Annual Form W-2 for yourself and any employees. Annual Form 940 (federal unemployment tax).
- Reasonable salary documentation: Keep records supporting your salary determination (industry surveys, job descriptions, time logs).
- Corporate formalities: While less rigid than a C-Corp, maintain meeting minutes, keep business and personal finances separate, and document major decisions.
S-Corp vs LLC vs C-Corp: Quick Comparison
| Feature | LLC (Default) | LLC with S-Corp Election | C-Corp |
|---|
| Self-Employment Tax | On all profits | On salary only | None (different structure) |
| Corporate Tax Rate | None (pass-through) | None (pass-through) | 21% flat rate |
| Double Taxation | No | No | Yes (corporate + dividend tax) |
| QBI Deduction (20%) | Yes | Yes (on distributions) | No |
| Payroll Required | No | Yes | Yes |
| Tax Complexity | Simple | Moderate | Complex |
| Annual Tax Filing | Schedule C or 1065 | Form 1120-S + K-1 | Form 1120 |
| Best For | Income under $60K | Income $60K-$500K+ | Venture-backed, retained earnings |
Frequently Asked Questions
What is an S-Corp election for an LLC?
An S-Corp election (filed via IRS Form 2553) allows your LLC to be taxed as an S-Corporation while maintaining its LLC legal structure. Instead of paying self-employment tax on all profits, you pay yourself a reasonable salary (subject to payroll taxes) and take remaining profits as distributions (not subject to self-employment tax). This can produce significant tax savings for profitable businesses.
How much can I save with an S-Corp election?
Savings depend on your net business income and reasonable salary level. Generally, an LLC owner with $80,000 or more in net profit can save $2,000–$10,000+ per year in self-employment taxes by electing S-Corp status. The higher your income above your reasonable salary, the greater the savings. Use our calculator above to get a personalized estimate.
What is a "reasonable salary" for an S-Corp?
The IRS requires S-Corp owners who work in the business to pay themselves a reasonable salary before taking distributions. Reasonable salary is determined by what similar positions pay in your industry and area. Factors include your experience, duties, hours worked, and company revenue. Generally, salary should be at least 40–60% of net profits for service businesses. Setting it too low risks IRS reclassification.
When does an S-Corp election make sense?
An S-Corp election typically becomes worthwhile when your LLC's net profit consistently exceeds $60,000–$80,000 per year. Below that, the added costs of payroll processing, extra tax return preparation, and state fees often offset the self-employment tax savings. The exact break-even varies by state and circumstances.
What are the ongoing costs of maintaining an S-Corp?
S-Corp ongoing costs include payroll processing ($30–$100/month), additional tax return preparation for Form 1120-S ($500–$1,500/year), state-specific fees, quarterly payroll tax filings, and potentially workers' compensation insurance. Total extra costs typically range from $1,500 to $4,000 per year beyond what a standard LLC costs.
How do I elect S-Corp status for my LLC?
File IRS Form 2553 (Election by a Small Business Corporation). For existing LLCs, file by March 15 of the tax year you want the election to begin. For new LLCs, file within 75 days of formation. Your LLC must have 100 or fewer shareholders, all of whom must be US citizens or residents. Some states also require a separate state-level S-Corp election or filing.