S-Corp Tax Savings Calculator

Calculator

The math behind the S-corp savings

The S corporation election does one specific thing: it splits your business income into a W-2 salary (subject to FICA) and distributions (not subject to FICA). The IRS still gets payroll tax on the salary portion, but the distribution portion escapes the 15.3% SE-tax hit that a sole proprietor pays on every dollar.

For 2026, the Social Security portion (12.4%) applies to the first $184,500 of wages or SE income. The Medicare portion (2.9%) has no cap. Above $200,000 single or $250,000 married filing jointly, an extra 0.9 percent Additional Medicare Tax kicks in on the employee side. The IRS lays this out in detail, and SSA publishes the wage base each year.

So the savings formula is roughly: payroll tax on the distribution portion you’re shifting off SE income, minus the cost of running payroll, filing Form 1120-S, and paying the state minimum tax, plus or minus the change in retirement-contribution capacity. The calculator above does the full computation including the Additional Medicare layer and the marginal-rate value of the retirement deduction.

Why the retirement contribution often decides this

The pure payroll-tax math usually favors the S-corp once profit clears about $80,000. The retirement math sometimes flips it. A sole proprietor with $200,000 of Schedule C income can put roughly $40,000 in a SEP IRA (20 percent of net earnings). The same person as an S-corp owner taking a $70,000 salary maxes the solo 401(k) at about $23,500 employee deferral plus $17,500 employer profit sharing — same $40,000 ballpark, but the path is different.

Where the S-corp wins on retirement: higher incomes where the SEP hits the $70,000 cap before the 401(k) does, because the 401(k) employee deferral isn’t tied to salary. Where the sole prop wins on retirement: lower or mid-range incomes where 20 percent of net earnings produces a bigger number than 25 percent of a deliberately-low S-corp salary.

The IRS limits for 2026: SEP IRA cap is $72,000 (or 20 percent of net SE earnings, whichever is less). Solo 401(k) employee deferral is $24,500 ($32,500 with the age-50 catch-up), employer profit sharing is 25 percent of W-2 compensation, total combined cap is $72,000 ($80,000 with catch-up). The IRS publishes these limits annually.

What counts as a “reasonable” salary

The IRS will reclassify distributions as wages if your salary is too low for the work you actually do. There’s no bright-line rule. The factors that come up in case law and Rev. Rul. 74-44:

• What comparable businesses pay for similar work in your geography
• Your training, certifications, and responsibilities
• Time and effort you put into the business
• What you’d have to pay an outside hire to do your job
• Bureau of Labor Statistics wage data for your industry and metro area

The calculator uses 35 percent of Schedule C income as the working assumption. In practice, salary usually lands between 30 and 60 percent depending on industry. David E. Watson, P.C. v. United States (2012) is the cautionary case: a CPA paying himself $24,000 on $375,000 of profit got reclassified to a $91,000 salary with payroll-tax assessments and penalties. The 35 percent default keeps you in the defensible range for most service businesses.

What this calculator doesn’t model

The number above is the federal payroll-tax piece plus the income-tax value of one retirement contribution at the marginal bracket. A real S-corp decision involves moving parts the calculator still skips:

• The §199A qualified business income deduction. Pass-through owners get a 20 percent deduction on QBI, subject to phase-outs. The deduction interacts differently with sole-prop income (full Schedule C) versus S-corp income (distributions only, not W-2 salary). For high earners in specified service trades, the S election can reduce the QBI deduction enough to wipe out the payroll-tax savings.
• State-specific S-corp taxes beyond the $800 minimum. California charges an additional 1.5 percent on S-corp net income on top of the $800 minimum. New York City charges GCT on S-corp income above $40,000 — about 8.85 percent in the top bracket. Tennessee and Illinois each have their own state-level taxes that don’t show up on the federal return.
• Catch-up contributions for age 50+. The default uses the standard $24,500 employee deferral limit and $72,000 combined cap. If you’re 50 or older, the limits rise to $32,500 deferral and $80,000 combined — meaningful at higher income levels.
• Spousal employment. Putting a spouse on payroll opens a second 401(k) capacity and a second standard deduction. Common move for owners with non-working spouses.

For an analysis that includes QBI, state-specific S-corp taxes, age-50 catch-up, and spousal payroll planning, our tax strategy consultation models all of it together.

When NOT to elect S-corp status

The S election is sticky — once you make it, revoking is a multi-year process and the IRS scrutinizes the revocation. Skip the election if:

• Schedule C income is under $60,000 after expenses. The math usually doesn’t justify the overhead.
• Your income fluctuates wildly year to year. The reasonable-salary requirement creates a floor you have to clear even in down years.
• You expect to bring on investors who need different share classes. S corps allow only one class of stock.
• You have significant business losses you want to deduct against other income. S-corp loss deductibility is capped at your stock basis, which can leave losses suspended.
• You live in a state with its own S-corp tax that eats most of the federal savings.

Related calculators and guides

Run the self-employment tax calculator to see what you’d owe as a sole prop in isolation. The SEP IRA calculator handles the sole-prop retirement side, and the 401(k) calculator handles the S-corp side once you’ve set a salary. For deeper context on the S election rules, see our S corporation guide, and on the reasonable-salary question specifically, how to set a reasonable salary for an S-corp owner.