Quick answer
On $120,000 of net business income with a $48,000 salary, an S-corp election saves about $9,269 a year in payroll taxes: $16,955 of self-employment tax as a sole proprietor against $7,686 of S-corp payroll tax. The saving is gross — admin costs of roughly $1,500 a year come off it.
How the S-Corp Tax Savings Calculator works, step by step
Enter your net business income and the share of it you would take as a W-2 salary. The calculator compares two ways of taxing the same profit: as a sole proprietor (or single-member LLC taxed as one), where the whole profit carries self-employment tax, and as an S-corp, where only the salary carries payroll tax and the rest flows out as distributions.
The sole-proprietor baseline is the 15.3% self-employment tax on 92.35% of net income: 12.4% for Social Security up to the annual wage base, plus 2.9% for Medicare on all earnings. On $120,000 of net income that is $16,955. Every dollar of profit is taxed, which is why the S-corp split has anything to save.
Under the S election, your salary goes through payroll and pays FICA — the 7.65% employee share plus the 7.65% employer share, 15.3% combined — while distributions escape payroll tax entirely. The calculator also adds about $342 a year of unemployment tax: $42 of FUTA (0.6% on the first $7,000 of wages after the state credit) plus roughly $300 of state unemployment tax. A higher salary shrinks the QBI deduction, because the salary is a business expense that reduces qualified business income — another reason the salary choice has two-way consequences.
The salary is the whole argument. The IRS requires reasonable compensation for the work you do, judged on the facts: your duties, experience, hours and what comparable businesses pay for similar services. There is no fixed percentage that is safe — the 60/40 rule is a myth — and if the salary is too low the IRS can reclassify distributions as wages, with back taxes, penalties and interest.
The calculator flags the election as worthwhile when gross payroll-tax savings exceed $2,000, but the saving it shows is before admin costs: payroll service, a separate Form 1120-S return and extra bookkeeping run roughly $1,500 a year. The break-even point is typically around $80,000 to $100,000 of net business income; below it, the admin usually eats the saving.
The formula
Annual saving = sole-proprietor self-employment tax − (FICA on W-2 salary + unemployment tax), where sole-proprietor tax = net income × 92.35% × 15.3% and FICA applies only to the salary portion.
Worked example — try it on the calculator above
Worked example: $120,000 net income, 40% salary
Net business income is $120,000 and the salary ratio is 40%, so the W-2 salary is $48,000 and distributions are $72,000. As a sole proprietor, self-employment earnings are $120,000 × 92.35% = $110,820, and the 15.3% tax is $16,955.46. As an S-corp, FICA on the $48,000 salary is $7,344, plus $342 of unemployment tax, for $7,686 of payroll tax. Gross saving is $16,955.46 − $7,686 = $9,269.46. After roughly $1,500 of admin costs, about $7,769 remains — provided the $48,000 salary is defensible as reasonable compensation for the work done.
Frequently Asked Questions
At what income level should a freelancer switch to an S-corp?
The break-even point is typically around $80,000 to $100,000 of net business income. Below it, payroll service, the Form 1120-S return and extra bookkeeping — roughly $1,500 a year — usually outweigh the FICA savings. This calculator flags the election as worthwhile when gross payroll-tax savings exceed $2,000 a year.
What is reasonable compensation?
It is the salary the IRS requires an S-corp owner-employee to pay themselves before taking distributions: what a comparable business would pay for the same work. The test looks at duties, experience, hours and market pay for similar roles. There is no fixed percentage or safe-harbor split in the tax code or regulations.
Are S-corp distributions completely tax-free?
No. Distributions escape FICA payroll tax — the 15.3% that is the whole point of the election — but you still pay federal and state income tax on them. The saving is the payroll tax on the distribution portion only, and it is reduced by the cost of running payroll and filing the separate corporate return.
What are the hidden costs of an S-corp?
Running an S-corp means a payroll service, a separate corporate tax return (Form 1120-S), federal and state unemployment taxes, and more complex bookkeeping — typically $1,500 to $2,500 a year. The calculator shows gross payroll-tax savings before these costs, so subtract them before deciding the election is worth it.
Estimates, not advice. This calculator provides educational estimates based on the inputs you enter and the assumptions shown on this page. It is not financial, tax or investment advice, and it cannot see your full situation. Verify important figures against official sources, and consider a qualified professional for decisions about your own money. See our Disclaimer and Methodology.