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Methodology

How we estimate S-corp savings.

A plain-English walk-through of the approach, the assumptions, and where the numbers can be off.

Last updated . Uses 2026 federal tax parameters.

The core idea

A single-member LLC taxed as a sole proprietor pays self-employment tax on its profit and income tax on what's left. Electing S-corp taxation splits that profit into a reasonable W-2 salary (which pays payroll tax) and a distribution (which does not), and it changes your QBI deduction. We compute your total federal tax both ways, subtract the real cost of running the S-corp, and show the difference.

Why your salary decides this

An S-corp does not lower the tax on your salary. It lowers the tax on the profit you take as a distribution instead of salary. Your W-2 salary pays the full 15.3% Social Security and Medicare tax, the same rate as self-employment tax; distributions do not. So the savings come entirely from the profit you can shift out of salary and into distributions:

Rough payroll-tax savings ≈ 15% × (net profit − your salary)

That's why a lower salary saves more and a higher salary saves less. You can't set it to zero, though. The IRS requires a reasonable salary for the work you actually do, and paying yourself an unreasonably low one gets your distributions reclassified as wages, with back taxes and penalties. Your occupation's market wage is the starting anchor for that salary — adjustable for experience, hours, and ability to pay — which is why we ask for it.

So the useful question isn't how much profit you make, but how much you make above a salary you could defensibly pay yourself. A wide gap leaves a large distribution and real savings. Little or no gap means there's nothing to shift, and the roughly $2,500 in payroll and filing costs turns electing into a net loss.

The same profit can point in opposite directions. On $120,000 of profit, a photographer whose market salary is about $45,000 has roughly $75,000 left to distribute and comes out clearly ahead. A software developer whose market salary is about $136,000 has almost nothing left to distribute, so electing does not pay. Same profit, opposite answer, because the salary differs.

Two forces soften the savings, and the calculator nets out both. Your salary is not qualified business income, so under an S-corp only the distribution counts toward the 20% QBI deduction; that smaller deduction claws back part of the payroll savings. And once your salary passes the Social Security wage base ($184,500 in 2026), extra distributions only escape the 2.9% Medicare portion, not the full 15.3%.

How the reasonable-salary tool works

The reasonable-salary calculator uses the market approach — the method federal courts lean on — anchored to the U.S. Bureau of Labor Statistics' Occupational Employment and Wage Statistics (May 2025, public domain). Your experience level selects a percentile band of your occupation's wages in your state (early career = 10th–25th percentile, up to top-of-field = 75th–90th). Time you spend running the company rather than doing the craft is valued at General & Operations Manager wages for the same band and region, and part-time hours scale the whole range, since time devoted is itself an IRS factor. Where BLS suppresses your state's estimate, we fall back to national wages and say so.

One deliberate choice: the range is never capped to your profit. A business that can't afford the market wage can defensibly pay less — ability to pay is a recognized factor — but that's a documented judgment, not a number a calculator should silently bless. When your profit can't support the range, the tool flags it and tells you what to document instead. (The savings calculator above does cap its salary band at profit, because there it seeds a tax estimate, where salary above profit is meaningless.)

The output is a documented starting range, not a safe harbor — no such safe harbor exists. Wage data refreshes with each annual BLS release.

What the calculator models

  • Self-employment tax vs. FICA on your salary, with the Social Security wage-base cap, coordination with any outside W-2 wages, and the 0.9% additional Medicare tax.
  • Federal income tax on each structure, using the 2026 brackets and standard deduction.
  • The QBI (Section 199A) deduction, including the fact that a W-2 salary is not QBI-eligible and shrinks the deduction under an S-corp. This is the piece most quick calculators skip.
  • The added cost of running the S-corp (payroll, extra tax prep, state fees) and any state entity-level tax.
  • A reasonable-salary range you can override, and a breakeven profit where electing starts to come out ahead.

What it does not model

To keep the inputs simple, the estimate assumes your business is your main income and that you take the standard deduction. It leaves out:

  • QBI phase-outs and the specified-service-business rules that begin above about $197,300 of taxable income ($394,600 married filing jointly). Above that line we flag the estimate as rough.
  • State income tax (it applies about the same either way, so it does not change the comparison), itemized deductions, credits, and investment or other household income.
  • Retirement-plan contributions (Solo 401(k), SEP-IRA), which can shift the picture.

The federal tax model is calibrated to the 2026 tax year.

Reasonable salary

Your salary is the biggest lever in this decision. When you pick your occupation, we anchor the estimate to the BLS median wage for that role (May 2025 OEWS), capped at your net profit, since you can't pay more salary than the business earns. That is the market-based approach the IRS and tax courts actually use, rather than a fixed percentage of profit. Treat it as a starting point: adjust for your experience, hours, and location, and confirm the figure with your CPA. If you skip the occupation, we fall back to a rough 35-55%-of-profit band.

How we handle your state

We reviewed all 50 states plus DC. What matters is the incremental entity-level tax: what electing adds on top of what your current entity already pays. Gross-receipts taxes (Hawaii, Washington, Ohio) and ordinary state income tax apply the same either way, so they do not change the result.

If you are a sole proprietor with no entity formed, you pay no entity-level tax today, so the full charge counts as new cost. That covers California's franchise tax, Illinois's replacement tax, and the entity-level tax in states that treat S-corps like C-corps (DC and Tennessee).

If you already run a single-member LLC, some states charge you at the entity level already, and that money is not a cost of electing. Delaware, Kentucky, New York and Tennessee charge by entity form, so an existing LLC there pays the same either way and electing adds nothing. California's $800 annual LLC tax is already owed by any California LLC, so only the amount above $800 is new. Illinois, Massachusetts, New Mexico and Oregon key their charge to how you are taxed federally, so a disregarded LLC genuinely starts paying on electing.

Three deliberate limits. We never show a negative state cost, so a state where your LLC pays more than an S-corp would shows $0 rather than a credit against federal tax (Delaware). We charge DC in full for an existing LLC, because DC exempts unincorporated businesses whose income is mostly the owner's own personal services, and we cannot tell from your inputs which side of that line you are on. And New York City is a special case: it does not recognize S-corps and adds its own 8.85% tax, while taxing LLCs 4%, so the real difference is smaller than the headline rate and a state-level number cannot capture it.

State entity costs were researched for tax year 2025, with the LLC-side comparison verified against each state's own tax authority in July 2026. Most are structural (flat minimums and fixed rates) and change rarely, but they are not re-verified annually the way federal parameters are.

Where the estimate can be wrong

  • Your reasonable salary is a judgment call, and it moves the answer the most.
  • High earners hit QBI phase-outs and the service-business cliff, which we only flag.
  • Other income, itemizing, credits, or retirement contributions can change your brackets.
  • State rules change, and local taxes (like city income taxes) can apply on top.

Sources

The rates and rules here come straight from the IRS and SSA. Don't take our word for it. Check them yourself: