An S-corp election only saves payroll tax on the profit left after a defensible salary — and admin costs eat the first few thousand. Enter your profit and salary to see whether the election wins for you.
Profit before your own salary, after other business expenses.
Must be "reasonable compensation" for your role — the IRS requires it.
Payroll service, Form 1120-S prep, registered agent, state franchise fee.
| Net Profit | SE Tax as Sole Prop | Break-Even Salary | As % of Profit | Max Savings (salary→$0) |
|---|---|---|---|---|
| $40,000 | $5,652 | $30,836 | 77% | $4,152 |
| $60,000 | $8,478 | $51,825 | 86% | $6,978 |
| $100,000 | $14,130 | $93,802 | 94% | $12,630 |
| $150,000 | $21,194 | $146,274 | 98% | $19,694 |
| $250,000 | $29,851 | $250,000 | 100% | $28,351 |
| $400,000 | $35,115 | $400,000 | 100% | $33,615 |
Assumes $1,500 of added admin cost and a 24% marginal rate. The "max savings" column is theoretical — it assumes a salary approaching zero, which the IRS reasonable-compensation rule will not allow. The practical saving sits well below that ceiling.
The pattern to notice: the break-even salary climbs toward 100% of profit as income rises. That is not a coincidence — once profit exceeds the Social Security wage base, every additional dollar of salary is charged 2.9% Medicare while every dollar of distribution is charged nothing, so the only way for the election to be a wash is for the salary to consume nearly all the profit.
An S-corp election does not change your income tax rate. It changes which dollars are subject to payroll tax. As a sole proprietor you pay self-employment tax — 15.3% of 92.35% of net profit, with the Social Security portion capped at the wage base ($184,500 for 2026). As an S-corp shareholder-employee you pay the same 15.3% on your W-2 salary, and the remaining profit passes through as a distribution with no payroll tax at all.
The entire saving depends on your salary being defensible. The IRS and Tax Court have consistently held that a shareholder-employee must take "reasonable compensation" before taking distributions. Cases such as Watson v. United States (8th Cir. 2012) and David E. Watson, P.C. v. Commissioner show the penalty for underpaying: the court recharacterised distributions as wages and assessed the employment taxes plus penalties. The professional rule of thumb is to start from what you would pay an unrelated employee to do your job, and document the reasoning.
The classic winning case is a service business with net profit of $80,000–$250,000 where the owner's reasonable salary is a modest fraction of profit — a consultant netting $200,000 whose market salary is $90,000 saves roughly $15,000/yr before admin costs. The election almost never wins for a business with net profit under $50,000, because the fixed admin cost exceeds the tax saved.
Advocates often quote the gap between SE tax on all profit and FICA on salary alone. That gap overstates the benefit for three reasons. First, the employer half of FICA is deductible, so routing money through payroll recovers part of the cost at your marginal rate — this calculator nets that out rather than ignoring it. Second, the QBI deduction shrinks slightly: the employer-half deduction reduces qualified business income, which reduces the 20% pass-through deduction. Third, the additional Medicare tax threshold is applied per individual on wages, which can pull the 0.9% surtax forward.
For a business around $100,000 of net profit, the realistic annual saving after honest admin costs is $6,000–$9,000 — meaningful, but far short of the "$15,000 saved" figures quoted in most marketing material, which assume a near-zero salary.
An S-corp election is generally effective for the next tax year if filed by March 15 of the current year (Form 2553). Late elections are possible with reasonable cause but add cost and uncertainty. Critically, the election cannot be easily undone — revoking it before five years requires IRS consent, and the built-in-gain rules under §1374 can tax appreciation that built up before the election if the corporation sells assets within five years.
Practically this means: elect when you expect the profit level to persist for at least three years, not in a single unusually good year. A business that elects in a $200,000 year and reverts to $60,000 pays admin costs it cannot recover.
⚠️ Important: This calculator compares the payroll tax cost of a sole proprietorship against an S-corp election. It does not model income tax brackets, the QBI deduction in detail, state franchise taxes, or the reasonable-compensation audit risk. The break-even salary shown is a payroll-tax break-even only — an S-corp salary below a defensible market rate for your role exposes you to retroactive employment taxes and penalties under the reasonable-compensation rules. Consult a CPA before filing Form 2553.