Sole prop vs LLC vs S-Corp tax savings

About this calculator

When to elect S-Corp — the SE tax math

Sole props (and default LLCs) pay 15.3% self-employment tax on ALL net SE income. S-Corp election lets you split SE income into:

Reasonable salary (subject to payroll tax = 15.3%)
Distributions (NOT subject to payroll tax)

The savings: 15.3% × distribution amount = S-Corp savings vs sole prop.

The math

Net SE income $150k, reasonable salary $90k, distribution $60k:

Sole prop SE tax: $150k × 0.9235 × 15.3% = $21,194
S-Corp payroll tax: $90k × 15.3% = $13,770
Savings: ~$7,400/yr

Where the math breaks down

Below ~$60k net SE: S-Corp setup + payroll cost ($1,500-3,000/yr) eats the savings
Reasonable salary too low: IRS audits S-Corp owners with absurdly low salaries ($20k for a $300k consultant). Get docked + penalties.
State rules vary: CA imposes 1.5% S-Corp franchise tax on top of regular tax — eats some savings.

When S-Corp wins

Net SE income $80k+
Predictable steady income (justifies setup overhead)
Legitimate "reasonable" salary defendable per BLS data for your role
State doesn't have a punitive S-Corp tax

When S-Corp loses

Below $60-80k net SE — overhead exceeds savings
Volatile income (irregular paychecks complicated)
High retirement contributions (S-Corp 25% employer cap limits Solo 401k contributions)
States with hostile S-Corp tax regimes (CA, IL — but still often net positive)

FAQ

What's a 'reasonable salary'?

Per IRC and IRS guidance: what an arms-length employer would pay for the same work. Use BLS Occupational Wage data; use Glassdoor/Indeed for your role. Document the comp methodology in your file. Industry rule of thumb: 50-65% of net SE for service businesses; less for capital-intensive.

Are LLC and S-Corp the same thing?

No. LLC is a state-law entity; S-Corp is a federal tax election. You can have an LLC taxed as: sole prop / partnership (default), C-Corp, or S-Corp. The S-Corp election is filed via IRS Form 2553 — must elect within 75 days of formation or by March 15 of effective year.

What about the QBI 20% deduction?

Both sole prop and S-Corp can qualify for QBI. S-Corp wages (your salary) DON'T count as QBI (only the distribution side does). At very high incomes, this means S-Corp's QBI base is smaller than sole prop's. Below the QBI threshold, both work fine.

Net SE income	$150,000
Reasonable salary if S-Corp	$90,000
Federal marginal rate %	24%
State income tax %	5%

Sole prop total tax	$62,151
S-Corp total tax	$55,618
SE tax saved by S-Corp	$7,424