Where the S corp saving comes from

A single-member LLC is taxed like a sole proprietorship by default: all of its profit is subject to 15.3% self-employment tax (on 92.35% of it, with the Social Security part stopping at $184,500 in 2026). An LLC — or a corporation — that elects S corp status instead pays you a salary through payroll. The salary carries the same Social Security and Medicare taxes, split between the company and you. The rest of the profit passes through to you as a distribution, which is subject to income tax but not to payroll tax. That gap is the whole saving: payroll tax on the distribution you no longer pay.

Three things eat into it, and the calculator counts all three:

  • The salary itself. The IRS expects S corp owners who work in the business to pay themselves reasonable compensation for that work, before taking distributions. A salary set too low to be credible is the classic S corp audit issue.
  • The QBI deduction. Your salary is not qualified business income, so a bigger salary shrinks the 20% QBI deduction, and the income tax goes up a little.
  • Running costs. Payroll software, a separate business tax return (Form 1120-S) and, in some states, S corp fees or taxes.

A worked example

$150,000 of profit, filing single. As an LLC, SE tax is $21,194 and federal income tax is $16,413: about $37,608 in total. As an S corp paying a $60,000 salary, payroll tax is $9,180 (both halves), the $83,410 distribution qualifies for a $16,682 QBI deduction, income tax is $19,149, and the S corp costs $2,000 to run: about $30,329. The election saves roughly $7,279 a year. The “savings at other salaries” table shows how much of that depends on the salary you choose.

What this leaves out

State taxes (some states tax S corps or treat them differently; put any state S corp tax in the cost field), the stricter QBI rules for specified service businesses (law, health, consulting and similar) above $201,750 of taxable income single or $403,500 joint, the benefits you can only get through payroll, and the Social Security benefit you give up by earning less in wages. For the reasoning behind the numbers and when founders typically switch, read our LLC vs. S corp tax math guide, and talk to a CPA before you elect.