When Does an LLC or S-Corp Actually Pay Off?
As a sole proprietor, your entire net profit is subject to self-employment tax of about 15.3% (Social Security plus Medicare), on top of ordinary income tax. Electing S-Corp tax treatment lets you split your income into a salary and a distribution โ only the salary portion is subject to payroll tax, so the distribution effectively escapes that 15.3% bite. But the IRS requires the salary to be "reasonable" for your role, and running an S-Corp brings real costs: state filing fees, a payroll service, and extra accounting work. Until your tax savings from the split exceed those added costs, staying a sole proprietor is often simpler and cheaper.
How It's Calculated
| Step | Item | Detail |
|---|---|---|
| 1 | Sole proprietor tax | Net profit ร ~15.3% self-employment tax |
| 2 | S-Corp payroll tax | Salary (~60% of profit) ร ~15.3% FICA |
| 3 | Annual savings | SE tax โ S-Corp payroll tax โ maintenance cost |
| 4 | Payback time | Setup cost รท annual savings |
This calculator uses a simplified 60% reasonable-salary assumption and does not include state tax, the wage base cap on Social Security tax, or the qualified business income (QBI) deduction. Talk to a CPA before making a final entity decision.
Frequently Asked Questions
Not necessarily โ with small profits, payroll and accounting costs can outweigh the tax savings. The advantage usually grows once profit reaches the tens of thousands.
Registered agent fees, payroll service fees, and the extra accounting or bookkeeping needed for the S-Corp election. Enter your expected annual total.
It uses a simplified 60% reasonable-salary assumption. Your actual reasonable salary depends on role, industry, and location โ confirm with a tax professional.
โป Actual tax savings depend on your specific situation and current tax law. This is an estimate only.