How does S-corp election save taxes?

As a sole proprietor, all net profit is subject to 15.3% SE tax. In an S-corp, you split income between salary (FICA on salary only) and distributions (no SE tax or FICA). Savings equal FICA rate times distribution amount.

What is a reasonable salary?

The IRS requires S-corp shareholders who perform services to pay themselves a reasonable salary — what an arm-length employee would earn for similar services. Underpaying salary is a common audit trigger.

When is S-corp worth it?

S-corp benefits typically exceed costs (additional accounting, payroll, state fees typically $2,000-$5,000 per year) when net business income exceeds $40,000-$50,000.

Does S-corp affect QBI deduction?

Yes. W-2 wages paid by the S-corp to the shareholder-employee count toward the W-2 wage limitation for QBI. S-corp income retained as distributions still qualifies as QBI.

What are S-corp built-in gains?

If a C-corp converts to S-corp, gains built in at conversion date are subject to corporate-level tax (21%) if recognized within 5 years. This is the built-in gains tax, a key consideration in C-to-S conversions.

US S-Corporation Election Tax Savings Calculator

Calculate SE tax savings from S-corp election. Business income split between reasonable salary (subject to FICA) and distributions (exempt from SE tax and FICA). Break-even analysis vs LLC taxed as sole proprietorship.

Principal ($)

Annual Rate (%)

Years

Compounding / Year

$ Finance Disclaimer: These calculators are for educational and illustrative purposes only. Results do not constitute financial advice. Consult a licensed financial advisor before making investment or borrowing decisions.

How It Works

Each component has a specific meaning:

S-corp election — The s-corp election recorded for the scenario being assessed.

Note: Interpret the s-corp election savings result against the thresholds and context described above.

How to Use

Enter the S-corp election for the scenario you are assessing. Calculate SE tax savings from S-corp election. Business income split between reasonable salary (subject to FICA) and distributions (exempt from SE tax and FICA). Break-even analysis vs LLC taxed as sole proprietorship. Use the s-corp election savings result to inform your calculation.

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How It Works

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Frequently Asked Questions

How does S-corp election save taxes?

What is a reasonable salary?

When is S-corp worth it?

Does S-corp affect QBI deduction?

What are S-corp built-in gains?