Sole Proprietor vs S-Corp: Which Saves More on Taxes?
As a sole proprietor, you pay 15.3% self-employment (SE) tax on your entire net profit. By electing S-Corp status, only your "reasonable salary" is subject to FICA taxes โ profits distributed beyond that salary are not. This can create significant savings for higher earners.
How the Calculation Works
- Sole Prop SE Tax = Net Profit ร 0.9235 ร 15.3%
- S-Corp SE Tax = Salary ร 0.9235 ร 15.3%
- Net Savings = Gross savings minus annual S-Corp admin costs
The S-Corp election generally makes sense when net profit exceeds $50,000โ$60,000/year and tax savings exceed the added accounting costs of roughly $1,000โ$3,000/year.
Frequently Asked Questions
Yes, S-Corp distributions are still subject to federal income tax โ they just avoid the 15.3% SE tax. Income tax rates are the same whether you're a sole proprietor or S-Corp owner.
If your net profit is under $40,000โ$50,000, the added costs of S-Corp administration often exceed the SE tax savings. Consult a CPA before making the election.
No. This is for educational estimation only. State taxes, deductibility of S-Corp costs, and individual circumstances vary โ always verify with a qualified CPA.