S-Corp vs LLC Tax Savings Calculator 2026

S-Corp vs LLC: How the Tax Savings Work

As a sole proprietor or single-member LLC, you pay self-employment tax (15.3%) on all your net earnings. This covers both the employer and employee portions of Social Security (12.4%) and Medicare (2.9%) taxes. When your income grows, this becomes a significant tax burden.

An S-Corporation election changes how this works. Instead of paying SE tax on all profits, you pay yourself a "reasonable salary" — and only that salary is subject to payroll taxes (the same 15.3%, split between employer and employee FICA). The remaining profit flows through as distributions, which are not subject to payroll or SE tax. The distributions are still subject to income tax, but you avoid the 15.3% payroll hit on that portion.

What Counts as a "Reasonable Salary"?

The IRS requires S-Corp owner-employees to pay themselves a reasonable salary before taking distributions. There's no hard percentage rule, but the salary should be comparable to what you'd pay someone else to do your job. Factors include your qualifications, the nature of your work, comparable wages in your area, and the time you devote to the business. Most tax professionals suggest 40–60% of net income as a starting point, though it varies by industry and role.

S-Corp Costs to Consider

S-Corp status comes with additional compliance costs that eat into your tax savings. You'll need to file a separate corporate tax return (Form 1120-S), run payroll (which means payroll software or a service), potentially pay state franchise or LLC fees, and may need a registered agent. These costs typically run $1,500–$3,000 per year. The calculator above factors these costs into the comparison so you can see your true net savings.

When Does an S-Corp Make Sense?

Generally, the S-Corp election starts making financial sense when your net self-employment income exceeds $50,000–$60,000 per year. Below that, the compliance costs often eat up most or all of the tax savings. The higher your income, the greater the potential savings — but it depends heavily on what a reasonable salary looks like for your specific business and role.

2026 Key Numbers

For the 2026 tax year, the Social Security wage base is $176,100. This means both LLC/sole prop SE tax and S-Corp payroll taxes on salary only apply the 12.4% Social Security rate up to this cap. The 2.9% Medicare tax (plus 0.9% Additional Medicare Tax above $200k/$250k) applies with no cap. The standard deduction is $15,700 (single) or $31,400 (married filing jointly), and the QBI deduction allows eligible self-employed individuals to deduct up to 20% of qualified business income.