Free tool · 2025 federal assumptions
S-Corp Tax Savings Calculator
Compare what you would owe in federal tax as a sole proprietor against what you would owe as an S-corporation — income tax, self-employment tax, FICA on owner payroll, and the qualified business income deduction.
Estimated federal tax
Difference —
- Income tax
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- SE / payroll tax
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- QBI deduction
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- Effective rate
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Illustrative only. This is a simplified federal estimate using 2025 figures. It does not include Massachusetts or any other state tax, credits, the net investment income tax, the additional Medicare tax, AMT, state unemployment or payroll-service costs, retirement contributions, or the cost of running an S-corp. Reasonable compensation is a facts-and-circumstances determination, not a percentage. Do not make an election based on this page — talk it through first.
How the S-corp saving actually works
There is only one mechanism behind almost every dollar an S-corp election saves, and it is worth understanding before you elect anything.
As a sole proprietor, your entire business profit is subject to self-employment tax — 15.3% on the first $176,100 of net earnings (12.4% Social Security plus 2.9% Medicare), and 2.9% Medicare with no ceiling above that. Profit is profit; the whole of it is exposed.
Elect S-corp status and the profit splits in two. You pay yourself a salary, which is W-2 wages and carries the same 15.3% in combined employee and employer FICA. Whatever is left over is a distribution, and distributions are not subject to self-employment or FICA tax at all. That gap is the saving. It is not a loophole and it is not aggressive — it is how subchapter S is designed to work.
Which is also why the salary number is the whole ballgame. Set it too low and you have not been clever, you have created an audit exposure.
Reasonable compensation is the constraint
The IRS requires an S-corp owner who performs services for the company to pay themselves reasonable compensation before taking distributions. It is a facts-and-circumstances test: what would it cost to hire someone else to do what you do, given your training, your duties, the hours you put in, what comparable businesses pay, and what the company can actually afford.
There is no safe-harbour percentage. You will see “60/40” and “50/50” rules of thumb repeated online; none of them appear anywhere in the code or the regulations. Recharacterisation of distributions as wages — with back payroll tax, interest and penalties — is one of the more common adjustments in a small-business examination.
The calculator above will warn you when the salary you enter looks implausibly low against profit. Treat that warning as the beginning of a conversation, not a verdict.
What the calculator leaves out
The estimate is deliberately federal-only and deliberately simple, which means several real costs sit outside it:
- Massachusetts tax. MA imposes a personal income tax, and there is an additional surtax on income above the state's threshold. An S-corp also has its own state filing obligations.
- The cost of running the S-corp. A separate 1120-S return, a payroll service, quarterly filings, and often a higher bookkeeping standard. For many owners this runs to a few thousand dollars a year, and it is a genuine offset against the saving.
- Retirement and benefits. Solo 401(k) and SEP contribution limits interact with W-2 wages in ways that can change the answer materially, sometimes in the S-corp's favour.
- NIIT, additional Medicare tax, AMT and credits. None are modelled.
- Your actual facts. Multi-state work, other businesses, a spouse's income, prior-year losses, and basis all move the number.
This is why the honest answer to “should I elect S-corp?” is usually “probably, above a certain profit, once the compliance cost is netted off” — and why the crossover point is different for every owner.
When an election usually starts to make sense
Run your own numbers above rather than trusting a threshold you read somewhere. What the arithmetic tends to show is that the saving is small or negative at low profit, because the fixed compliance cost swamps it; that it grows as the gap between profit and a defensible salary widens; and that it flattens once wages pass the Social Security wage base, since the 12.4% component stops applying to either structure above that point.
The election itself has deadlines. Form 2553 is generally due within two months and fifteen days of the start of the tax year you want it to apply to, though late-election relief exists in many circumstances. If you are reading this in the back half of the year, the realistic question is usually about next year.
Talk it through
Mike Isaac, EA, is an IRS Enrolled Agent in Stoneham, Massachusetts — federally licensed to represent taxpayers before the IRS — working with owners across Greater Boston on entity strategy, reasonable compensation and the payroll setup that has to follow an election.