Enter your business's net profit before paying yourself. This is typically your Schedule C net profit. Do not include personal salary here — the slider below handles that.
FICA Tax Comparison: LLC vs. S-Corp
Visual breakdown of where each dollar of FICA tax goes — amounts in USD
⚠ Disclaimer: This tool provides an estimate of FICA tax savings only and does not account for federal/state income taxes, QBI deductions, or state-specific S-Corp fees (e.g., California's $800 minimum franchise tax). S-Corp elections also involve additional administrative costs including payroll setup, Form 1120-S filing, and ongoing compliance. Not legal or tax advice. Consult a CPA.
How It Works
The Magic of S-Corp Tax Savings
When you operate as a Sole Proprietor or Single-Member LLC, the IRS treats 100% of your net business profit as self-employment income. That means you owe the full 15.3% Self-Employment (SE) tax — a combined Social Security (12.4%) and Medicare (2.9%) charge — on your entire net earnings (technically on 92.35% of it, since you first deduct half the SE tax). For a freelancer netting $120,000, this amounts to roughly $16,955 in SE tax per year before any income tax is even calculated.
Electing S-Corporation status changes the equation dramatically. As an S-Corp owner-employee, you split your income into two buckets: a W-2 salary (which is subject to FICA taxes, split 50/50 between you as employee and the corporation as employer) and an owner's distribution (which flows through to your personal return completely free of FICA tax). Because distributions are not subject to Social Security or Medicare taxes, every dollar paid as a distribution instead of salary represents a 15.3% FICA saving. On a $60,000 distribution from a $120,000 profit, that's approximately $9,180 in tax that simply doesn't exist.
The savings compound significantly at higher income levels. At $200,000 net profit, the difference can exceed $15,000 annually — enough to comfortably offset the cost of payroll software, a bookkeeper, and the additional corporate tax return. This is why S-Corp election is consistently one of the most recommended tax strategies for profitable solopreneurs earning above approximately $50,000–$80,000 in net profit.
IRS Guidelines
What Is a "Reasonable Salary"?
The IRS is well aware that S-Corp owners could theoretically set their salary to $1 and take everything as a distribution, avoiding nearly all FICA tax. The agency explicitly prohibits this. Under IRC § 3121 and related guidance, an S-Corp owner who performs services for the corporation must receive a salary that is reasonable for the work performed — comparable to what you'd pay a non-owner employee or outside contractor to do the same job.
What counts as "reasonable" is fact-specific. The IRS and courts look at factors including: your industry and the going market rate for your role, the corporation's revenues and profits, compensation paid to non-owner employees, and the time and effort you devote to the business. For a one-person service business (consultant, attorney, designer, developer), many tax professionals use a benchmark of 40–60% of net profit as a starting point, then adjust for market wages. The key is documenting your rationale and being consistent year-to-year. Underpaying yourself as a tactic to minimize FICA is one of the most common S-Corp audit triggers the IRS pursues.
Should You Elect?
Is an S-Corp Right for You?
An S-Corp election is not a universally superior choice — it comes with meaningful administrative overhead. Before deciding, every solopreneur should honestly evaluate the full cost picture. Additional annual costs typically include: payroll processing software or a payroll service ($500–$1,500/year), a separate corporate tax return (Form 1120-S, often $500–$1,500 in CPA fees beyond your personal return), quarterly payroll tax deposits and filings, and in some states additional franchise or minimum taxes (California charges $800/year minimum regardless of profit).
The consensus among tax professionals is that an S-Corp election generally starts to make financial sense when your net profit consistently exceeds $50,000–$80,000 per year. Below that threshold, the compliance costs often eat into or exceed the FICA savings. Above that level — and especially past $100,000 — the net benefit grows substantially and the election becomes increasingly attractive. If you're unsure, use this calculator as a starting point and take the output to a CPA who specializes in small business taxation for a personalized analysis.
One additional consideration: the Qualified Business Income (QBI) deduction under IRC § 199A allows eligible sole proprietors and S-Corp owners to deduct up to 20% of qualified business income. The interaction between S-Corp salary, distributions, and QBI is complex — higher salary can actually reduce your QBI deduction in some situations. This is another reason why a holistic analysis with a tax professional is essential before making the election.