Professional services
S Corp Tax Calculator
Estimates S corporation tax, where reasonable compensation is the whole question.
Result
Not tax advice. Entity choice, reasonable compensation, pass-through deductions and state treatment interact in ways that depend entirely on your circumstances, and the rules change annually. This estimates a set-aside; the decision belongs with an accountant. Reasonable compensation is the crux and it is not a number you choose freely: it must reflect what the work would cost to hire, and setting it artificially low to shift income into distributions is among the most commonly examined positions there is. An S corp also brings payroll filings, a separate return and in some states an entity-level tax, all of which erode the saving at lower profit levels.
Get a Free Business AuditHow the calculation works
An S corporation passes income through to shareholders, who pay income tax on their share. The distinction that matters is that a shareholder working in the business must take reasonable compensation as W-2 wages subject to payroll taxes, while the remaining profit distributed to them is not subject to self-employment tax. The saving is payroll tax on the distributed portion, set against the cost of running payroll and filing a separate return.
What moves the number
- The split between wages and distributions.
- Whether the wage figure is defensible as reasonable compensation.
- Payroll administration and additional filing costs.
- State treatment, which does not always follow the federal election.
Where this one goes wrong
Setting wages artificially low to shift profit into distributions is the error the IRS looks for, and reasonable compensation means what the market would pay for the work actually performed rather than the minimum that avoids attention. A reclassification produces back payroll tax, interest and penalties. The other point is that the saving is real but bounded, since Social Security stops at the wage base, so the arithmetic favours the election at some profit levels and not others. Work it with a professional rather than from a rule of thumb.
Before you quote
- Document how the reasonable compensation figure was arrived at.
- Count payroll and filing costs against the payroll tax saving.
- Check whether your state recognises the S election.
Where the rules come from
Questions
About this calculator
How much salary must an S corporation owner take?
Reasonable compensation for the work actually performed, judged against what the market would pay someone else to do it. There is no safe percentage. Setting it artificially low to shift profit into distributions is exactly what gets reclassified, with back tax, interest and penalties.
Where does the S corporation saving come from?
Profit distributed beyond reasonable wages is not subject to self-employment tax, so the payroll tax applies to a smaller base. The saving is bounded, because the Social Security portion stops at the wage base anyway, so it helps at some profit levels more than others.
What does the election cost to maintain?
Running payroll with its filings and deposits, a separate corporate return, and in some states additional fees or non-recognition of the election. Those costs are real and they are why the election does not pay at lower profit levels.
The formula
saving = self-employment tax as a sole trader - payroll tax on the salary - payroll and accounting costs
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How to use this calculator
- Net business profit ($). Enter your own figure; the page starts at $165,000.
- Reasonable salary ($). Must reflect the market value of the work. Setting it too low is a common audit trigger.
- Self-employment tax rate (%). Enter your own figure; the page starts at 15.3%.
- Employer payroll tax on the salary (%). Enter your own figure; the page starts at 7.65%.
- Payroll and extra accounting cost ($). Enter your own figure; the page starts at $2,400.
- State franchise or entity tax (%). Enter your own figure; the page starts at 0%.
The result updates as you type, so you can try a figure, see what it does to net saving from the election, and change it back. Nothing you enter is sent anywhere or saved.
A worked example
These are the figures the calculator opens with. Every number in the results column below is produced by the same calculation the page runs, so you can follow it through before putting your own figures in.
What goes in
| Input | Value |
|---|---|
| Net business profit | $165,000 |
| Reasonable salary | $85,000 |
| Self-employment tax rate | 15.3% |
| Employer payroll tax on the salary | 7.65% |
| Payroll and extra accounting cost | $2,400 |
| State franchise or entity tax | 0% |
What comes out
| Result | Value |
|---|---|
| Net saving from the election main result | $7,909 |
| Self-employment tax as a sole trader | $23,314 |
| Payroll tax under the S corp | $13,005 |
| Taken as distribution | $80,000 |
| Profit where the election starts paying | $109,027 |
The election saves about $7,909 a year: $23,314 of self-employment tax replaced by $13,005 of payroll tax on the salary, with $80,000 taken as distribution.
How sensitive the answer is
Holding everything else steady and changing only net business profit, this is what happens to net saving from the election. It is worth knowing which of your inputs the answer actually hinges on, and which barely move it.
| Net business profit ($) | Net saving from the election |
|---|---|
| $82,500 | -$3,748 |
| $123,750 | $2,080 |
| $165,000 example above | $7,909 |
| $247,500 | $19,566 |
| $330,000 | $31,223 |
Every other input is held at the example value while this one changes, which is not how a real job behaves. Treat it as a guide to which number matters most, not as five separate quotes.
What each figure means
- Net business profit ($)
- A money amount, starting at $165,000.
- Reasonable salary ($)
- Must reflect the market value of the work. Setting it too low is a common audit trigger.
- Self-employment tax rate (%)
- A percentage, between 0 and 20, starting at 15.3%.
- Employer payroll tax on the salary (%)
- A percentage, between 0 and 12, starting at 7.65%.
- Payroll and extra accounting cost ($)
- A money amount, starting at $2,400.
- State franchise or entity tax (%)
- A percentage, between 0 and 10, starting at 0%.
What the results tell you
| Result | What it is |
|---|---|
| Net saving from the election | The headline result. A money figure. |
| Self-employment tax as a sole trader | A money figure. |
| Payroll tax under the S corp | A money figure. |
| Taken as distribution | A money figure. |
| Profit where the election starts paying | A money figure. |
Keep going
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