S-Corp vs LLC Tax Savings Calculator
Compare tax obligations as an LLC (sole proprietorship) versus an S-Corp election. See the exact revenue point where switching to an S-Corp saves money on self-employment taxes.
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Revenue minus all business expenses
What you would pay someone to do your job
Payroll service, extra accounting, state fees
Your state income tax rate (0 if no state tax)
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Formula
How it works: As an LLC sole proprietor, you pay 15.3% self-employment tax on all net income. With an S-Corp election, you only pay FICA taxes (15.3%) on your "reasonable salary," not on remaining profit distributions. The savings come from the difference, minus additional S-Corp costs like payroll processing.
Worked Example
What Are S-Corp and LLC Tax Differences?
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.
- LLC owners pay 15.3 percent self-employment tax on all net profits.
- S-Corp owners pay FICA taxes only on their "reasonable salary," not on profit distributions.
- Significant tax savings can occur when net income exceeds the reasonable salary.
- S-Corp status involves additional costs and compliance requirements for your business.
Understanding these tax structures is crucial for optimizing your business's financial health. Use our S-Corp vs LLC Tax Savings Calculator to see your potential savings and determine the optimal structure for your business.
You can also calculate changes using our Freelancer Rate Calculator, Quit Your Job Calculator or Net Profit Calculator.
Frequently Asked Questions
At what income should I consider an S-Corp?
Most accountants suggest considering the S-Corp election when net self-employment income consistently exceeds $40,000 to $50,000 per year. Below that, the additional costs of running an S-Corp (payroll, accounting, state fees) often outweigh the tax savings.
What is a "reasonable salary" for an S-Corp?
The IRS requires S-Corp owners to pay themselves a reasonable salary before taking profit distributions. This is based on what the role would pay in your industry and location. Setting it too low invites IRS scrutiny. A common guideline is 40-60% of net income.
What are the extra costs of an S-Corp?
S-Corps require payroll processing ($500-$2,000/year), more complex tax returns (Form 1120S, about $500-$1,500 to prepare), possible state franchise taxes, and potentially higher accounting fees. Budget $1,500-$3,000/year in added costs.
Can any LLC elect S-Corp status?
Yes, a single-member or multi-member LLC can elect S-Corp tax treatment by filing IRS Form 2553. The LLC remains an LLC legally but is taxed as an S-Corp. You must file by March 15 for the current tax year.
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