Sole Proprietor vs S Corp Tax Calculator
This calculator compares self-employment tax on your full business profit as a sole proprietor against payroll tax on a proposed S corporation salary, with the remaining profit paid as a distribution.
How this is calculated
As a sole proprietor, your entire net business profit is subject to self-employment tax: 92.35% of net profit is taxed at 12.4% Social Security (capped at the annual wage base) plus an uncapped 2.9% Medicare, with an Additional Medicare Tax of 0.9% above $200,000 ($250,000 married filing jointly).
As an S corporation, only the salary you pay yourself as a shareholder-employee is subject to FICA payroll tax, at the same rates applied to 100% of wages rather than the 92.35% used for self-employment tax. The remaining profit, paid out as a distribution, is not subject to Social Security or Medicare tax at all. This is the entire source of any tax saving.
This comparison covers self-employment and payroll tax only. It does not model the qualified business income (QBI) deduction, which is computed differently for each structure, or the ongoing cost of running an S corporation.
Worked example
Suppose your business nets $120,000 and, as an S corporation, you pay yourself a salary of $60,000 and take the rest as a distribution. A sole proprietor pays self-employment tax on the whole profit; the S corporation pays FICA only on the salary:
| Sole proprietor | S corporation | |
|---|---|---|
| Net business profit | $120,000 | $120,000 |
| Paid as salary (subject to FICA) | — | $60,000 |
| Paid as distribution (no FICA) | — | $60,000 |
| Self-employment / payroll tax | $16,955.46 | $9,180 |
| Saved by the S corporation | — | $7,775.46 |
Open this example in the calculator to change any figure.
Sources
Frequently asked questions
- How do I know what a "reasonable salary" is?
- There is no fixed percentage or formula. The IRS and courts weigh factors including the duties performed, time devoted, training and experience, and what comparable businesses pay for similar roles. This calculator cannot tell you the correct number for your situation.
- What happens if the IRS decides my salary was too low?
- The IRS can recharacterize distributions as wages and assess back payroll taxes, penalties, and interest on the amount it determines should have been paid as salary.
- Does electing S corp status change my income tax?
- Broadly, no. The same total profit is taxed at the same income tax rates either way. The saving shown here comes specifically from the portion of profit that escapes Social Security and Medicare tax as a distribution rather than wages or self-employment income.
- Are there other costs to running an S corporation?
- Yes. Running payroll, filing a separate corporate tax return, and potential state-level fees or franchise taxes all add cost and complexity that this calculator does not estimate.
- Do I have to pay myself a salary before taking any distributions?
- Yes. The IRS requires reasonable compensation to be paid to a shareholder-employee before non-wage distributions are made.