Should you elect S-Corp, and at what income?
A sole proprietor pays self-employment tax on almost all profit. An S-Corp owner pays payroll tax on their salary only, and the rest comes out as a distribution that payroll tax never touches. Running a corporation costs real money, so there is an income below which electing loses. This works out where that line sits for you.
Example: $120,000 profit, $60,000 salary, single filer
The form for your own figures loads with JavaScript. The results below are worked out for this example.
Electing S-Corp would save about $3,660 a year
That is after the cost of payroll and the extra return.
Side by side
| Sole proprietor | S-Corp | |
|---|---|---|
| Payroll / self-employment tax | $16,955 | $9,180 |
| Federal income tax | $11,506 | $14,122 |
| QBI deduction claimedA salary is wages, not qualified business income, so electing shrinks this. | $19,084 | $11,082 |
| Total federal tax | $28,462 | $23,302 |
| Cost of running the S-Corp | — | $1,500 |
| Difference | — | $3,660 saved |
- Salary through payroll
- $60,000
- Distribution (no payroll tax)
- $55,410
Your breakeven
Keeping salary at about 50% of profit, electing starts to pay once profit passes $24,115. Below that, the payroll tax saved does not cover payroll and the extra return.
Before you act on this
- Federal tax only. Several states tax S-Corps directly — California charges a 1.5% franchise tax, for one — and state costs can erase the whole federal saving. Check your state before electing.
What electing actually involves
- Filing Form 2553 with the IRS, generally within the first two and a half months of the tax year you want it to apply to.
- Running real payroll for yourself, with withholding and quarterly filings. This is the part people underestimate.
- Filing Form 1120-S each year in addition to your personal return, with a K-1 to yourself.
- Keeping business and personal money genuinely separate.
How these numbers are produced, and what they leave out, is on the methodology page.
Where the saving comes from
Self-employment tax is 12.4% for Social Security plus 2.9% for Medicare, charged on 92.35% of your net profit. As a sole proprietor, every dollar of profit goes through that.
Elect S-Corp and the business pays you a salary. That salary carries the same payroll taxes, split between you and the company — but you are both, so you feel both halves. What is left after salary comes to you as a distribution, and distributions are not subject to payroll tax at all. The saving is whatever payroll tax the distribution avoids.
Two things limit it. The Social Security portion stops at $184,500 of earnings, so above that a distribution only avoids Medicare. And a salary is wages rather than qualified business income, which shrinks your 20% QBI deduction — quietly giving back part of what you saved.
Reasonable compensation is the whole game
The saving grows as salary falls, which creates an obvious temptation. The IRS knows this. The standard is what the business would pay someone else to do your job, judged on your facts — your duties, hours, experience, and what comparable roles pay. There is no safe percentage, and no formula this or any calculator can supply.
An S-Corp owner paying themselves an implausibly small salary and taking the rest as distributions is one of the most recognisable audit patterns there is. If the numbers only work at a salary you could not defend to a stranger, they do not work.
What this calculator leaves out
- State taxes and fees. Some states tax S-Corps directly. California charges a 1.5% franchise tax on S-Corp income, which can wipe out the federal saving entirely.
- Health insurance and retirement. Both interact with the election — 2%-shareholder health insurance has its own rules, and solo 401(k) limits change with how you are paid.
- The QBI wage limit above the income threshold. Above $201,750 of taxable income for a single filer, the deduction depends on W-2 wages and property. The calculator says so instead of guessing.
- Your time. Monthly payroll, quarterly filings and a second annual return are not free even when you do them yourself.
Where these figures come from
Every rate and threshold used above comes from a primary source, last checked on September 21, 2026:
- IRS Topic no. 554, Self-employment tax — Rates, 92.35% net earnings, Additional Medicare thresholds
- IRS Topic no. 751, Social Security and Medicare withholding rates — "For earnings in 2026, this base limit is $184,500"
- IRS: Qualified business income deduction — "up to 20 percent of their QBI" — note this IRS page is stale on the end date, superseded by OBBBA
- Rev. Proc. 2025-32 — §4.26 thresholds (page 22); §2.12 records OBBBA §70105's $400 minimum
The full method, including what is deliberately out of scope, is on the methodology page. These are estimates for planning, not tax advice — see the disclaimer.