Electing S-Corp status lets you split profit into a W-2 salary (subject to payroll tax) and distributions (not subject to FICA). Set a defensible salary to see your payroll-tax savings — and the IRS reasonable-compensation target.
| Net Profit | Salary | Sole Prop Tax | S-Corp Payroll Tax | Annual Savings |
|---|---|---|---|---|
| $100,000 | $60,000 | $15,300 | $9,180 | $6,120 |
| $150,000 | $80,000 | $22,950 | $12,240 | $10,710 |
| $200,000 | $100,000 | $28,678 | $15,300 | $13,378 |
| $250,000 | $120,000 | $30,578 | $18,360 | $12,218 |
| $300,000 | $150,000 | $32,478 | $22,950 | $9,528 |
Once profit and salary both exceed the $184,500 Social Security wage base, only the 2.9% Medicare tax (plus 0.9% additional Medicare over $200k/$250k) applies — so the marginal savings rate falls and total savings can peak then decline as salary rises.
An S-Corp must pay shareholder-employees a reasonable salary — the IRS can reclassify low salaries as wages and assess back payroll tax plus penalties. "Reasonable" means what you would pay an unrelated employee to do the same work in your industry and region.
As a sole proprietor you owe 15.3% self-employment tax on net profit (12.4% Social Security up to the wage base, 2.9% Medicare above). As an S-Corp, only your W-2 salary is subject to payroll tax; the remaining profit flows out as a distribution and avoids FICA entirely. The 0.9% additional Medicare tax still applies to wages above $200k ($250k MFJ).
S-Corp status adds payroll processing, Form 1120-S filing, and possibly state franchise tax — typically $1,000-$2,500 a year. The payroll-tax savings often exceed that well before you reach $100k of profit.
The S-Corp election is a payroll-tax tool, not an income-tax tool. It does not change your income tax on business profit — that flows through to your 1040 either way on a Schedule C or a K-1. What it changes is how much of your profit is subject to the 15.3% self-employment tax. Every dollar you move from profit to distribution (by keeping salary at a defensible minimum) saves roughly 15.3 cents in payroll tax until you hit the Social Security wage base.
The break-even is usually somewhere between $40,000 and $60,000 of net profit. Below that, the added accounting and payroll cost can exceed the tax saved. Above $150,000 the savings are typically five figures a year, which is why professional-service firms — consultants, contractors, real-estate agents, and medical practices — elect S-Corp status routinely.
The IRS scrutinizes S-Corps that pay a token salary and take the rest as distributions. In Watson v. United States the court upheld reclassification of distributions as wages when the salary was clearly below market. The test is facts-and-circumstances: training, experience, duties, time devoted, and comparable pay in your industry.
A safe approach is to anchor your salary to a published salary survey for your role and document the reasoning. If you take a low salary in a lean year, raise it in a strong year. The penalty for underpaying is not just the back payroll tax — it includes interest and accuracy-related penalties, so the downside can erase years of savings.
⚠️ Important: This calculator estimates payroll (FICA/SE) tax only. It does not model income tax, the QBI deduction interaction, state payroll taxes, or added S-Corp compliance costs. Reasonable compensation is a facts-and-circumstances determination enforced by the IRS. Consult a CPA before electing S-Corp status.