LLC vs S-Corp Tax Savings Calculator (2025)

Worked example

Scenario: Single filer, 120,000 net profit, 60,000 reasonable salary, 4,000 extra S-corp cost.

Default LLC / sole proprietor

• SE base: 120,000 × 0.9235 = 110,820
• Social Security: 12.4% × 110,820 (below the 176,100 cap) = 13,742
• Medicare: 2.9% × 110,820 = 3,214
• SE income is below 200,000, so no Additional Medicare Tax
• Total SE tax = 16,956

S-corp election

• Salary of 60,000 × 15.3% FICA = 9,180 (7,440 Social Security + 1,740 Medicare)
• Remaining ~60,000 taken as a distribution pays 0 SE/FICA tax

Result

• Gross payroll-tax saving: 16,956 − 9,180 = 7,776
• Less extra S-corp cost: 7,776 − 4,000 = 3,776 net saving

The S-corp saves roughly 3,800 per year here. A smaller QBI deduction under the S-corp (salary is not QBI) would trim this by a few hundred to ~1,500 depending on your bracket, so treat 3,776 as the pre-QBI headline saving.

How the LLC vs S-corp tax saving actually works

A single-member LLC is, by default, a “disregarded entity” taxed exactly like a sole proprietor. Every dollar of net profit flows onto your Schedule C and is hit by two layers of tax: ordinary income tax and the 15.3% self-employment (SE) tax. That SE tax is the combined 12.4% Social Security and 2.9% Medicare that an employee and employer would normally split. Because you are both, you pay the whole thing. The only softeners are that SE tax applies to 92.35% of net profit rather than 100%, and half of it is deductible against income tax.

Electing S-corporation status (via Form 2553) does not change your legal entity — your LLC stays an LLC — but it changes how profit is taxed. Now you split profit into two buckets. The first is a reasonable salary you pay yourself as a W-2 employee, and that salary is fully subject to 15.3% FICA. The second is a distribution of the remaining profit, and this is where the magic happens: distributions to an S-corp shareholder are not subject to SE or FICA tax at all. They still get taxed as ordinary income, but they escape the 15.3% payroll layer entirely.

So the saving is not about income tax — your income tax is roughly the same either way. The saving is purely on payroll tax. If your net profit is 120,000 and you pay yourself a 60,000 salary, only 60,000 gets hit by FICA under the S-corp instead of all 110,820 (the SE base) under the LLC. That gap, multiplied by 15.3%, is the gross saving. The calculator computes exactly this: your LLC SE tax minus your S-corp FICA on salary, then subtracts the extra cost of running the S-corp. Two things cap the upside. Above the 2025 Social Security wage base of 176,100, the 12.4% portion drops off anyway, so very high salaries already avoid part of the tax as a sole prop. And the more of your profit you (legitimately) route to distributions, the more IRS scrutiny you invite if the salary looks unreasonably low.

Choosing a reasonable salary without triggering the IRS

The single biggest lever in this calculator — and the biggest risk — is the reasonable salary. Lower the salary and more profit becomes tax-free distribution, so your saving rises. But the IRS explicitly requires S-corp owner-employees to pay themselves “reasonable compensation for services rendered” before taking distributions, and this is one of the most litigated areas in small-business tax. Pay yourself 15,000 on 150,000 of profit and you are inviting a reclassification audit that can turn your distributions back into wages, with back payroll taxes, interest, and penalties.

There is no single formula in the tax code, but auditors and courts look at consistent factors: what you would pay someone else to do your job, your training and experience, the time and effort you devote, comparable salaries in your industry and region, and what portion of profit is driven by your labor versus by capital or other employees. A practical benchmark many practitioners use is to set salary at roughly 40% to 60% of net profit, or to anchor it to market-rate compensation data (for example, Bureau of Labor Statistics wage figures for your occupation) — whichever better reflects the value of your work. The calculator lets you test different salary levels so you can see the trade-off directly.

Watch what happens as you move the slider. Because the Social Security portion (12.4%) stops at the 176,100 wage base, once your salary approaches that ceiling the marginal benefit of shifting more to distributions shrinks to just the 2.9% Medicare difference. That is why very high earners see the largest raw dollar savings but a smaller percentage saving on each additional dollar. Conversely, at modest profit levels an aggressive low salary barely beats the compliance cost. The safest posture is a salary you can defend with documentation: a written compensation study, job description, and industry data kept in your files. A saving of a few thousand dollars a year is not worth the exposure of a number you cannot justify to an examiner.

The costs and catches most calculators ignore

The payroll-tax saving is real, but it is a gross figure. Three things eat into it, and a fair comparison has to net them out. First is the hard cost of being an S-corp. You now have to run formal payroll (even for one person), file quarterly payroll returns (941s), issue yourself a W-2, file an annual Form 1120-S corporate return, and often pay a state franchise tax or S-corp fee. Realistically this adds 3,500 to 5,000 a year in software, bookkeeping, and preparer fees. That is why the calculator subtracts a compliance cost and why the S-corp only wins above a break-even profit level, typically somewhere around 60,000 to 80,000 of net profit for a 4,000 cost.

Second is the Qualified Business Income (QBI) deduction. The 20% QBI deduction is calculated on your business income, and under an S-corp the wages you pay yourself are not QBI. So the S-corp shrinks your QBI base by the amount of your salary, which quietly raises your income tax and claws back part of the payroll saving. Depending on your bracket this can be a few hundred to over a thousand dollars a year, and above the 2025 taxable-income thresholds (197,300 single, 394,600 married filing jointly) the interaction gets more complex still. Treat the calculator’s headline number as the pre-QBI payroll saving and shave it accordingly.

Third are the softer costs and consequences. A lower salary means lower Social Security earnings credited to you, which can reduce your future benefit. Retirement-plan contributions (SEP-IRA, Solo 401(k) employer portion) are based on W-2 wages for an S-corp, so a low salary caps how much you can shelter. And an S-corp brings real administrative discipline: separate accounting, reasonable-comp documentation, and payroll deadlines with their own penalties. For a business earning 40,000 of profit, none of this is worth it. For one clearing 150,000 with a defensible salary, the S-corp can save 8,000 or more a year even after every cost above. Run your own numbers, then confirm with a CPA before filing Form 2553.

Frequently asked questions