LLC vs. S-Corp Tax Savings Calculator
Calculate annual self-employment tax savings from electing S-Corporation tax status, reasonable W-2 officer salary, payroll FICA taxes, and compliance overhead.
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Frequently Asked Questions
How does an S-Corporation save on self-employment taxes?
As a standard LLC or sole proprietor, 100% of your business net profit is subject to the 15.3% Self-Employment (SE) tax (Social Security and Medicare). By electing S-Corp status (IRS Form 2553), you pay SE/FICA tax only on your 'Reasonable W-2 Salary'. The remaining profit is distributed as a dividend, completely free of the 15.3% SE tax.
What does the IRS consider a 'Reasonable Salary' for an S-Corp owner?
IRS guidelines require shareholder-employees to be paid a market-rate wage comparable to what independent businesses pay for similar duties, industry standards, and geographic location. Common benchmarks range from 40% to 60% of total company net profit.
At what income level does an S-Corp election make financial sense?
An S-Corp generally makes financial sense once annual business net profit reliably exceeds $60,000 to $80,000. Below that threshold, additional annual compliance expenses (payroll processing, Form 1120-S corporate return, state franchise taxes) cancel out the tax savings.
What are the additional costs of maintaining an S-Corporation?
Expect approximately $1,500 to $3,000 annually for automated payroll software (Gusto, ADP), commercial bookkeeping, CPA preparation for federal Form 1120-S and Schedule K-1, and local state franchise entity fees (e.g., California's $800 annual minimum tax).