Choosing an S-corp election is a payroll decision disguised as a tax decision. The 15.3% FICA saving on distributions is real, but it is measured against payroll fees, FUTA, state unemployment insurance, and a smaller QBI deduction. This computes the net difference, not the headline.
| Scenario | SE Tax (LLC) | FICA (S-Corp) | Payroll Cost | QBI Lost | Net Savings |
|---|---|---|---|---|---|
| $120,000 profit, $60,000 salary, 1.0% state payroll tax | $16,955 | $9,180 | $2,262 | $2,880 | $2,633 |
| $180,000 profit, $80,000 salary, 1.5% state payroll tax | $25,433 | $12,240 | $2,862 | $3,840 | $6,491 |
| $60,000 profit, $40,000 salary, 2.0% state payroll tax | $8,478 | $6,120 | $2,462 | $1,920 | $-2,024 |
Each row deducts state payroll tax, FUTA and a $1,200 payroll service from the FICA saving, then subtracts the QBI deduction lost on the reclassified amount at a 24% marginal rate. The $60,000-profit row is the warning: at that level the fixed payroll costs exceed the entire FICA saving, and the election loses money each year.
The IRS requires an S-corp owner-employee to take a salary comparable to what a similar business would pay an employee for the same work. There is no formula, but the audit tests are consistent:
Payroll service fees run $600–$1,800 a year. The business pays 6.2% Social Security and 1.45% Medicare on wages, plus FUTA at 0.6% on the first $7,000, plus state unemployment insurance. The owner also loses the 20% QBI deduction on the amount moved from profit to salary, and often loses the ability to make Solo-401(k) contributions on that profit as well.
Because most payroll costs scale with salary while fixed fees do not, a break-even salary exists. Below roughly $50,000–$60,000 of profit after a reasonable salary, the election rarely pays. Above roughly $150,000 of profit with a modest salary, the FICA saving dominates.
If your business profit after a reasonable salary is under about $40,000, the FICA you would save — 15.3% of that amount at most, half of which was already deductible — is often smaller than a single year of payroll fees plus the accounting required to maintain it. Businesses with multiple owner-employees, a retirement plan that bases contributions on wages, or a state with expensive unemployment insurance need an even wider margin.
The other underappreciated cost is administrative: separate payroll filings, Form 1120-S, K-1s, and a stricter definition of what counts as a business expense.
The strongest case is a consulting or professional practice with more than $150,000 of profit, one owner, and few employees. Paying a defensible market salary of $70,000–$90,000 leaves $60,000–$90,000 of distributions that escape the 15.3% FICA tax. In that band the saving typically runs $6,000–$10,000 a year, enough to absorb payroll costs several times over.
Note the QBI interaction carefully: the 20% deduction is measured after wages are paid, so reclassifying profit as salary reduces it. At a 24% marginal rate that offsets roughly 4.8% of the reclassified amount and must be subtracted from the FICA saving, as this calculator does.
⚠️ Important: Estimates only. The QBI interaction, state payroll taxes, retirement plan contribution limits, and reasonable-salary determination all vary by situation and state. The 2026 Social Security wage base is modelled at $184,500. Confirm with a CPA before electing S-corp status — an election is hard to unwind.