S-Corp Salary Calculator

How the S-Corp split actually works

An S-Corp is not a different kind of company — it is a tax election layered on top of an LLC (or corporation). What changes is how profit reaches your pocket. Without the election, 100% of an LLC's net income is self-employment income: every dollar carries the full 15.3% SE tax (Social Security + Medicare, both halves) on top of income tax. With the election, your extraction splits into two streams that the tax law treats very differently:

1. W-2 salary. You become an employee of your own company. The salary pays both halves of FICA — 6.2% Social Security (up to the 176,100 wage base) + 1.45% Medicare (uncapped), plus the 0.9% Additional Medicare Tax above $200,000 of wages.
2. Distributions. The profit left after salary and expenses passes through as K-1 income — no payroll tax of any kind, only ordinary income tax (with a QBI deduction still available on this slice).

The entire game is arithmetic: every dollar moved from the "salary" column to the "distribution" column saves 15.3% of payroll tax — if and only if the salary you keep paying is defensible. That conditional is not a footnote; it is the whole deal.

Why the QBI deduction behaves differently

The 20% Qualified Business Income deduction applies to K-1 pass-through income only — your own W-2 wages are excluded from QBI by statute. So an S-Corp owner's QBI deduction is usually smaller than a sole proprietor's (it covers distributions, not salary), which claws back part of the payroll-tax savings at the income-tax layer. The calculator models this interaction exactly rather than applying a flat "S-Corps save 15.3%" shortcut — which is precisely the oversimplification most online articles make.

What makes a salary “reasonable”

The IRS requires S-Corp owner-employees to pay themselves a salary before taking distributions, and that salary must be reasonable compensation for the services actually rendered — a facts-and-circumstances test the courts have litigated for decades. The factors that carry weight:

• What comparable businesses pay for your role and duties — salary surveys, job postings for your exact function, Bureau of Labor Statistics data by metro.
• Your role and time commitment — a founder working 50 hours/week delivering the service cannot credibly pay themselves $20k while distributing $180k.
• Training, experience, and licensing — specialized professional services command documented market rates.
• What the business would pay a stranger to do the same work — the cleanest framing of the test.
• Consistency year over year — a salary that swings to track profits looks like a distribution in disguise.

Red flags the IRS and tax courts have actually used: salaries far below industry norms, distributions many times the salary, salary set as a round percentage with no market support, and — the classic audit fact pattern — leaving salary at zero while the business profits. This calculator deliberately refuses to “optimize” your salary for that reason: enter a defensible number and it tells you what the election is worth at that number.

Worked example at $200,000 profit

The calculator's default scenario — $200,000 net profit, an $80,000 salary (40% of profit),$1,200 of annual payroll/compliance overhead, single filer, 2025 federal rules, no state tax:

The election is worth $9,408/year at a 40% salary ratio. Notice the structure of the win: payroll tax drops by $14,953, but income tax rises by $4,345 (smaller QBI deduction, no half-SE deduction) and overhead takes $1,200 — the net is what matters, and only a full model shows it.

When the election actually pays

The savings are roughly 15.3% × (profit − salary) minus income-tax side effects minus overhead. That formula makes the decision boundaries legible:

• Below roughly $40–50k of profit, there is usually not enough distribution mass for the payroll-tax savings to clear payroll service minimums, extra return preparation, and unemployment insurance. The math can still show a small win — the operational hassle usually isn't worth it.
• $80k–$400k of profit with a market-supported salary well under the SS wage base is the sweet spot. This is where the per-year delta routinely runs $5k–$15k.
• When your defensible salary approaches or exceeds the 176,100 wage base, the arbitrage shrinks: dollars above the base only carried 2.9% Medicare anyway, so moving them to distributions saves little — and the Additional Medicare Tax adds a new cost on the salary side.
• If you plan to reinvest most profit and sell someday, the C-Corp analysis (QSBS, 21% retained) is the more relevant comparison — that is the LLC vs C-Corp tool's job.

Costs beyond this model

This tool is federal-only and deliberately narrow. Real elections carry moving parts it does not price — fold them into the overhead input:

• Payroll service — $40–$150/month for a single-employee S-Corp.
• Form 1120-S and state equivalents — often $500–$2,000/year more in preparation fees than a Schedule C.
• FUTA + SUTA — federal unemployment is typically $42–$420/year on the first $7,000 of wages (with the credit); state unemployment varies widely and some states tax S-corp owner wages.
• State franchise or S-corp-specific taxes — e.g. California's 1.5% franchise tax on S-corp net income ($800 minimum), Tennessee's excise tax. In those states the calculus changes materially.
• Workers' compensation — some states require coverage even for officer-only companies.
• Retirement plan geometry — a solo 401(k) can be fed by both salary deferral and profit-sharing under either structure; an S-corp's employer contribution is based on W-2 wages. Sometimes the retirement plan, not the payroll tax, should drive the salary level.

How to elect (and unwind)

1. Form or keep your LLC; ensure it's a single permissible shareholder structure (US citizens/residents, no entities as owners for S status).
2. File IRS Form 2553 — no later than March 15 (2 months & 15 days after the start of the tax year) for the election to apply that year, with all shareholders consenting.
3. Set up payroll before the first pay date: EIN withholding account, state withholding registration, unemployment accounts, and a payroll provider.
4. Pay yourself on a regular schedule (bi-weekly or monthly) with withholding — not ad-hoc transfers, which courts read as distributions.
5. Issue W-2 to yourself in January; the K-1 comes from the 1120-S filed by March 15.

Unwinding is possible (voluntary revocation of S status) but has its own cost basis and timing rules — another reason to run the numbers and talk to a CPA before filing 2553, not after.

Important caveats

• Federal, single-filer, tax-year 2025 model. No state income tax, no state unemployment beyond your overhead input.
• SSTB QBI phase-outs above $197,300 of taxable income are not modeled — consultants, attorneys, and health professionals above that line face a reduced or zero QBI deduction in reality.
• The model assumes the salary you enter is defensible; it does not judge it. The savings at an indefensible salary are not savings — they are an assessment waiting to happen.
• Employee benefit discrimination rules (health insurance, HSA interactions with S-corp >2% shareholders) are outside this model.
• Nothing here is tax advice. Verify the current year's wage base, thresholds, and your state's rules with a qualified professional.