S-Corp Election Calculator — When the Switch Pays Off

How it works

Under the LLC default, every dollar of net profit is subject to self-employment tax (15.3% on the first $184,500 of SE base in 2026, 2.9% Medicare above). An S-corp splits profit into two buckets: reasonable salary (subject to payroll/FICA tax at the same 15.3% effective rate) and distributions (taxed only as income, no FICA). The savings come from moving as much of the profit as possible into the distribution bucket.

The catch is "reasonable salary". The IRS expects the salary portion to match what someone would be paid to do the same work as an employee. Setting salary at 20% of profit to maximise distribution savings is a well-known audit trigger. Common defensible ratios sit at 40-70% of profit depending on industry and revenue size; the calculator's 60% default sits in the middle of this band.

The other catch is compliance overhead. Running an S-corp adds a payroll service, an 1120-S federal return, a state corporate return, W-2 and K-1 filings, and an extra accounting hour or two each month. The all-in overhead is typically $1,500-5,000 per year. Below ~$40-50k of net profit, the SE tax savings rarely exceed this overhead — that's the practical break-even threshold.

Common mistakes

• Setting salary too low— "reasonable salary" is the IRS's favourite S-corp audit issue. Look at the BLS Occupational Employment Statistics for your role + region as the defensible baseline. Going materially below that figure invites a payroll-tax adjustment and a 100% penalty on the underpayment.
• Ignoring state corporate tax— many states tax S-corps separately even though they pass through federally. New York City's general corporation tax, Tennessee's franchise + excise tax, and California's 1.5% S-corp tax all eat into the savings. The state-tier dropdown above approximates the additional bite, but a state-specific check with a CPA is essential.
• Electing too early— most accountants suggest waiting until net profit clears $40-50k consistently before bothering with the election. The break-even point only stays positive after that. Filing Form 2553 at lower profit is paying compliance overhead for tax savings that don't materialise.
• Forgetting SE tax has a cap — the 12.4% Social Security portion stops at $184,500 of SE base in 2026. Past that, only the 2.9% Medicare remains. S-corp savings on distributions above the wage base shrink to about 2.9% of the distribution amount, not 15.3%. High-income S-corp arithmetic is materially different from mid-income.

Worked example

A consultant in Texas (no state income tax) clears $150,000 of net profit. Reasonable salary at 60% = $90,000. Distribution = $60,000. S-corp compliance overhead = $2,500.

LLC default: SE base = $150,000 × 92.35% = $138,525. SE tax = $138,525 × 15.3% = $21,194. Federal income tax (approx 20% effective at this band) = $30,000. Total = ~$51,200.

S-corp: FICA on $90,000 salary = $13,770. Federal income tax on full $150,000 ≈ $30,000 (same as LLC, since federal income tax is on combined wages + distribution). Plus overhead $2,500. Total = $46,270. Savings = $4,930 per year.

That $4,930 is worth the election — but the margin tightens if the reasonable salary needs to be higher (say 75% would shave savings to about $2,700) or if state corporate tax applies. The same consultant in California would lose another $2,250 to the 1.5% franchise tax + extra state filing, dropping the net benefit to roughly $2,700 — still positive but materially smaller.

When to use this calculator

Use this when you have an LLC or sole proprietorship that has consistently cleared roughly forty to sixty thousand dollars of net profit and you want to know whether electing S-corp status delivers enough self-employment tax savings to justify the added payroll and compliance overhead. Re-run the numbers each year as profit grows or as the reasonable-salary band tightens.

If profit is still climbing toward the break-even threshold, hold the election and continue with the LLC default. Pair the result here with the Estimated Tax Calculator to see whether the quarterly payment schedule changes meaningfully after the election.

Frequently Asked Questions

Glossary

Reasonable Salary

The W-2 wage an S-corp owner-employee must pay themselves for the work they actually perform. Set too low and the IRS will re-characterise distributions as wages.

Distribution

The portion of S-corp profit paid to owners after reasonable salary. Subject to income tax but not FICA, which is where the S-corp savings live.

Form 2553

The IRS election form an LLC or C-corp files to be taxed as an S-corp. Generally due within 75 days of the start of the tax year you want the election to take effect.

Related calculators

Try these scenarios

Pre-filled examples — click any chip to load the inputs and result.

• $100k profit, moderate state, 60% salary
• $200k profit, no state tax, 50% salary
• $50k profit (break-even test)

How to calculate S-corp tax savings vs LLC

1. 1
   Enter annual net profitProjected or trailing-12-month net profit before salary.
2. 2
   Set reasonable salary percentage60% is a typical defensible default. Below 40% raises IRS audit risk; above 80% reduces the savings.
3. 3
   Pick state tier and overheadState affects taxable income; overhead defaults to $2,500/yr (payroll + 1120-S).
4. 4
   Read the savings and decision flagPositive savings means S-corp is worth electing. Negative means LLC default is cheaper.