S-Corp vs LLC Tax Savings Calculator

Net Income: $120,000, Reasonable Salary: $60,000, S-Corp Costs: $2,000/year Step 1: LLC SE tax = $120,000 x 92.35% x 15.3% = $16,960 Step 2: S-Corp FICA = $60,000 x 15.3% = $9,180 Step 3: S-Corp total = $9,180 + $2,000 = $11,180 Step 4: Annual savings = $16,960 - $11,180 = $5,780

Many small business owners choose between forming a Limited Liability Company, or LLC, and electing S-Corp status for tax purposes. A standard LLC, by default, is taxed as a sole proprietorship or partnership, meaning the owner pays self-employment taxes, which cover Social Security and Medicare, on all net business income. This rate is 15.3 percent on earnings up to a certain threshold and then 2.9 percent on Medicare above that. By contrast, electing S-Corp status allows the business owner to become an employee of their own company. They must pay themselves a "reasonable salary" on which FICA taxes, the employer and employee portions combined totalling 15.3 percent, are withheld. Any remaining profits can then be distributed to the owner as dividends, which are not subject to self-employment taxes. This distinction can lead to significant tax savings, especially as net business income grows. However, S-Corps come with additional administrative burdens and costs, such as payroll processing, stricter compliance, and potentially more complex accounting.