How to Calculate Your S-Corp Tax Savings
Electing to be taxed as an S-Corporation (S-Corp) can help self-employed people reduce their tax bill, especially when it comes to self-employment taxes. Here's a step-by-step guide on how S-Corp tax savings work and how to calculate your potential benefit.
Step-by-step example
1. Calculate your net income
This is your business profit — your total revenue minus your business expenses.
For example: Net income = $100,000.
2. Estimate your self-employment tax as a sole proprietor
If you're taxed as a sole proprietor or single-member LLC, you’ll pay self-employment tax (15.3%) on your entire net income.
Example: $100,000 × 15.3% = $15,300 in self-employment tax.
3. Set a reasonable salary
When you're taxed as an S-Corp, the IRS requires you to pay yourself a reasonable salary. That salary is subject to the same 15.3% payroll tax, but any remaining profit is not — it’s considered a distribution and avoids self-employment tax.
For example: Reasonable salary = $60,000, Distribution = $40,000. You’ll only pay payroll tax on the salary: $60,000 × 15.3% = $9,180.
4. Compare the tax difference
As a sole proprietor, you’d pay $15,300 in self-employment tax. As an S-Corp, you’d pay $9,180 in payroll tax. That’s a tax savings of $6,120.
Limits to this calculation:
This calculator gives you a quick estimate — but a few factors can affect your actual tax savings:
- QBI Deduction (Section 199A)
- The Qualified Business Income (QBI) deduction allows many self-employed people to deduct up to 20% of their business profit from their taxable income. When you elect S-Corp status, your reported profit is lower (because you’re paying yourself a salary), so your QBI deduction may be smaller. charge.
- State taxes
- Running an S-Corp involves more administrative complexity. You’ll need to run payroll, file quarterly payroll tax forms, and submit a separate corporate tax return (Form 1120-S). Many business owners also hire a bookkeeper or use a payroll provider. These services can cost anywhere from $1,000 to $3,000 per year, which reduces your net savings.
- Administrative costs
- Administrative fees: Starting an S-Corp comes with increased administrative requirements, such as payroll, S Corp tax filing, and bookkeeping. These are not considered in the calculation.