Entity & S-Corp Tax Optimizer
See how much an S-corp election could save vs a sole-proprietor / single-member LLC — and find the reasonable salary that balances tax savings against IRS scrutiny. Built on 2025 figures.
Estimate only, for planning — not tax advice. Uses 2025 federal brackets, the $176,100 Social Security wage base, §199A QBI with the SSTB phase-out, the ½ SE-tax deduction, and a flat state rate applied to taxable income (state rules vary). Excludes retirement contributions, credits, and other income. Confirm with a CPA before electing.
S Corp vs LLC Tax: Understanding Entity Selection
The question behind every S corp vs LLC tax comparison is simple to state and harder to price: how much profit can move from self-employment tax into a tax-free distribution, and what reasonable salary do you need to pay yourself to get there safely. This calculator runs the 2025 numbers so you can see the potential S corp tax savings side by side.
Entity selection changes how profit is taxed, not how much you earn. A sole proprietor or default single-member LLC pays self-employment tax on nearly all net income; an S-corp splits income into salary and distribution, and only the salary carries payroll tax. Built for CPA firm owners and the clients they advise — not a substitute for advice from your own CPA.
How to Use This Calculator
- Enter your annual profit before owner pay. Use net profit before any salary or distribution to yourself.
- Pick your filing status and state tax rate. This sets the federal brackets and the Additional Medicare Tax threshold.
- Set your reasonable salary with the slider. Move between a lower, riskier salary and a higher, safer one.
- Read the side-by-side total tax and savings. Compare sole-prop/LLC against the S-corp result, including added S-corp costs.
How an S-Corp Saves Self-Employment Tax
As a sole proprietor or single-member LLC, self-employment tax is 15.3% on 92.35% of net SE income — 12.4% Social Security up to the 2025 wage base of $176,100, plus 2.9% Medicare with no cap, and an extra 0.9% Medicare surtax above $200,000 single / $250,000 MFJ. Half of SE tax is deductible, but the rest is a direct cost. An S-corp doesn't change that on your salary: W-2 wages are subject to FICA at the same 15.3%, split 7.65% employer/employee. The saving comes from the remaining profit paid as a distribution — not wages, and not subject to SE tax or FICA at all. That gap is the entire mechanism behind S corp tax savings.
Sole Proprietorship vs LLC vs S-Corp vs C-Corp
What Counts as a Reasonable Salary
The IRS requires a reasonable salary before any profit is distributed, but there's no fixed formula — it's a facts-and-circumstances test. In Watson v. Commissioner, a CPA's $24,000 salary was found unreasonably low given firm profit, and the shortfall was recharacterized as wages with back payroll tax and penalties. Firms typically weigh:
- Role and duties — day-to-day work versus a passive investor role.
- Market rate for the role — what an unrelated employer would pay for the same job.
- Time devoted to the business — full-time owners need higher salaries than part-time ones.
- Comparable-firm pay — compensation surveys for similarly sized practices are the usual evidence.
- Reclassification risk — an artificially low salary is the most common trigger for IRS scrutiny.
The QBI / SSTB Catch for Accounting Firms
Section 199A allows a 20% deduction on qualified business income, but wages are never QBI — so the salary an S-corp owner must pay shrinks the income eligible for the deduction, in a way a sole proprietor's full profit isn't. That partly offsets the FICA saving: a higher, safer salary means smaller savings on both fronts. Accounting firms are also a Specified Service Trade or Business (SSTB), so the deduction phases out entirely over 2025 taxable income of $197,300–$247,300 (single) or $394,600–$494,600 (MFJ), and disappears above the top of that range. Above the phase-out, QBI drops out of the entity-selection math and the decision comes down to FICA savings against S-corp running costs.
