S-Corp vs. LLC Tax Savings Calculator (2026)
Calculate your exact self-employment tax reduction, reasonable salary distribution, required payroll overhead, and net annual take-home increase under an S-Corporation tax election (IRS Form 2553).
1
Your Business Numbers
$120,000
Gross business revenue minus all ordinary business expenses (Schedule C / Form 1065 net).
$60,000 (50%)
Subject to 15.3% payroll taxes. The rest is distributed FICA-free. Select a preset:
$1,800/yr
Payroll service (Gusto/QuickBooks ~$600) + CPA Form 1120-S filing (~$1,200).
2
2026 Tax Comparison & Verdict
Saves Money
$16,955
$9,180
+$7,775
-$1,800
FICA-Free Distributions: $60,000
How S-Corp Election Saves Taxes: The Mechanics of FICA Splitting
When you operate as a standard single-member LLC or sole proprietorship, the IRS treats 100% of your net business earnings as subject to self-employment tax. Under Internal Revenue Code (IRC) §1401, self-employment tax is 15.3%, composed of:
- 12.4% Social Security tax on the first $176,100 of net earnings (the 2026 inflation-adjusted wage base).
- 2.9% Medicare tax on all net earnings (with no dollar cap), plus a 0.9% Additional Medicare Tax on high earners over $200k single / $250k married.
Under a standard LLC earning $120,000, you pay self-employment tax on 92.35% of that net profit ($110,820), resulting in approximately $16,955 in mandatory FICA payments before you ever calculate federal or state income taxes.
The S-Corporation Advantage
By filing IRS Form 2553 (Election by a Small Business Corporation), your LLC is taxed as an S-Corporation. You become both an employee and a shareholder. You pay the 15.3% FICA tax only on your W-2 Reasonable Salary. The remaining net profit is distributed to you as a shareholder distribution (reported on Schedule K-1), which is 100% exempt from self-employment tax.
When Does an S-Corp Make Sense? (The $80,000 Profit Benchmark)
An S-Corporation is not free. Setting up and running an S-Corp introduces mandatory administrative overhead that standard LLCs do not face:
| Overhead Expense | Estimated Annual Cost | Why It Is Required |
|---|---|---|
| Payroll Processing Software | $500 – $750 / yr | To generate W-2s, file Form 941 quarterly payroll reports, and withhold federal/state taxes. |
| CPA Corporate Tax Return (Form 1120-S) | $1,000 – $1,800 / yr | Separate informational corporate tax return with Schedule K-1s for shareholders. |
| State Franchise & Minimum Entity Taxes | $0 – $800 / yr | California charges $800 min tax; Delaware charges $300; states like TX, FL, and WY charge $0. |
If your net profit is below $70,000 – $80,000, the gross FICA savings (around $2,000) are almost entirely eaten up by payroll software and tax prep fees. The S-Corp election only provides meaningful financial leverage once net profit exceeds $80,000, scaling rapidly above $100,000.
How the IRS Defines a “Reasonable Salary” (Avoiding Audit Penalties)
The most common mistake small business owners make is paying themselves a ridiculously low salary (e.g., $20,000 on a $150,000 profit) to artificially minimize FICA taxes. The IRS actively audits S-Corporations that report zero or unreasonably low officer compensation under Revenue Ruling 74-44.
In court precedents (such as David E. Watson, P.C. v. United States), the IRS and federal judges evaluate five key criteria to determine if an S-Corp salary is defensible:
- Training and Experience: What would a business pay a non-owner with your exact skills to perform your daily tasks?
- Time and Effort Devoted: Do you work 40+ hours per week full-time, or is this an absentee passive holding?
- Comparable Market Wages: Data from the Bureau of Labor Statistics (BLS) or Salary.com for your job title and metro area.
- Dividend History & Net Capital: S-Corps with substantial equipment or capital investments justify a larger distribution ratio than pure service businesses.
- Compensation to Comparable Non-Shareholder Employees: What do your top staff members earn?
Frequently Asked Questions: S-Corp vs. LLC Taxes
Does an S-Corp election change my legal LLC liability protection?
No. An S-Corp is purely a federal tax classification. Your underlying business remains a Limited Liability Company (LLC) registered with your Secretary of State, maintaining the full corporate veil of limited liability.
Can I still take money out of the business whenever I want?
Yes. You can take shareholder distributions at any time from available cash flow. However, you must maintain a consistent W-2 salary history and ensure your distributions do not exceed your shareholder basis.
What happens if I miss the March 15 Form 2553 deadline?
The IRS allows retroactive late election relief under Revenue Procedure 2013-30. If you had reasonable cause and operated as an S-Corporation from day one, you can file Form 2553 late with an attached reasonable cause explanation statement.