How does an S corp save tax?

A sole proprietorship or single-member LLC pays self-employment tax on nearly all of its profit. An S corp owner pays payroll tax only on a reasonable salary; the rest of the profit can come out as distributions without Social Security or Medicare tax.

S corp savings calculator

Would electing S corp status save you tax? Enter your business's yearly profit and the salary you'd pay yourself, and see the self-employment tax you'd save after the added costs.

Yearly business profit

Profit before paying yourself: revenue minus business expenses. Reasonable salary you'd pay yourself

What you'd have to pay someone else to do your job. How to set a reasonable salary Added yearly cost of being an S corp

Payroll service, the separate S corp tax return and extra bookkeeping. Ask your CPA for a quote.

Estimated yearly savings as an S corp

Self-employment tax as an LLC or sole proprietor$0

Payroll tax on your S corp salary$0

Added cost of being an S corp$0

Savings$0

A rough estimate for 2026 using Social Security and Medicare rates and the $184,500 Social Security wage base. It leaves out income tax effects, such as the deduction for half of self-employment tax and changes to the 20% business income deduction, and state taxes. Use it to decide whether to ask your CPA, not to file.

How the calculation works

As a sole proprietor or single-member LLC, you pay self-employment tax on 92.35% of your profit: 12.4% for Social Security up to the year's wage base, and 2.9% for Medicare on all of it.

As an S corp, you and the company together pay the same 15.3% payroll tax, but only on your salary. The profit above your salary comes out as distributions, which carry no Social Security or Medicare tax. The difference, minus what it costs to run payroll and file a separate return, is the savings.

Common questions

At what profit does an S corp make sense?

When the payroll tax saved on the profit above a reasonable salary is more than the added cost of running payroll and filing a separate S corp return. For many owners that happens once profit is comfortably above the salary their role requires.

What salary should I enter?

What you would have to pay someone else to do the work you do, based on your duties, hours and local pay. Setting it too low invites the IRS to treat your distributions as wages, with back taxes and penalties.

Why doesn't a lower salary always mean more savings?

It saves payroll tax, but it also lowers what your company can put in your retirement plan, and it can reduce the 20% business income deduction at higher incomes. And it has to stay defensible.

How do I elect S corp status?

File Form 2553 with the IRS, by March 15 to start that calendar year. An LLC can make the election and stays an LLC under state law. Read the full guide to the S corp election.

See the real numbers for your businesses

Cratchit keeps your books, compares S corp status at your actual profit, suggests the lowest salary you can defend from government wage data, and keeps the record that backs it. Take a guided tour with the Harpers, a sample family.

Try the demo

Education, not advice. Confirm the details with your CPA before electing S corp status.