S Corp Tax Savings Calculator

A single owner in Texas, which has no state income tax, expects $150,000 of profit. As an S corporation the owner would take a $70,000 salary and spend $2,500 a year more on payroll service, the corporate return and state fees.

Payroll tax on the salary is $10,752.00 against $21,194.33 of self-employment tax on the whole profit. The smaller QBI deduction gives some of that back in income tax, and the running costs take more, leaving a saving of $4,977.85 a year.

The salary drives the result. The same business at four salaries:

A lower salary saves more on paper, but the salary has to be reasonable for the work you do, and the IRS can treat distributions as wages when it isn't. Size matters too. With the salary at half the profit:

An S corporation must pay a shareholder who works in the business reasonable compensation before it makes non-wage distributions, and the IRS can reclassify distributions as wages subject to employment taxes. The IRS doesn't set an amount or a percentage of profit. It looks at where the business's gross receipts come from: to the extent they come from your own services, payments to you should be wages; to the extent they come from other employees or from capital and equipment, they can be distributions.

Factors the IRS lists for judging reasonable compensation include:

• your training and experience, duties and responsibilities, and the time and effort you devote;
• the company's dividend history, and what it pays non-shareholder employees;
• the timing and manner of bonuses to key people, and any compensation agreements or formula;
• what comparable businesses pay for similar services.

That is why the salary is an input here rather than something the calculator picks. Set it from what you would have to pay someone else to do your job, and agree it with your tax adviser.

An LLC is a business structure under state law, not a tax status. A single-member LLC is disregarded for income tax by default, so it is taxed like a sole proprietorship, which is what the left column assumes. It can elect to be treated as a corporation, and an entity eligible to be treated as a corporation files Form 2553 to elect S corporation status. So the comparison here is really between two tax treatments of the same business.

The S corp election cost is mostly ongoing: running payroll, filing a separate corporate return (Form 1120-S) each year, and any state fees, franchise or S corporation taxes. Enter your own estimate as the running costs. This estimate uses federal tax rules, your state's personal income tax and the running costs you enter; it doesn't include state taxes on S corporations themselves or state unemployment tax beyond what you add to the running costs. To see your tax as a sole proprietor in detail, with quarterly payments, use the 1099 tax calculator; if you are still deciding whether to leave a job, the 1099 vs W-2 calculator compares a salary with contract income.

An S corporation saves employment tax on the profit above a reasonable salary, at the price of payroll, a second return and a smaller QBI deduction at lower incomes. In the example, $150,000 of profit with a $70,000 salary saves $4,977.85 a year after $2,500 of running costs.

Run your own profit, a defensible salary and your real running costs through the S corp tax savings calculator, and try a higher salary as a second scenario before you file the election.