How S-corp tax savings work
As a default LLC (taxed as a sole proprietorship or partnership), almost all of your net profit (the IRS figures it on 92.35%) is subject to self-employment tax — 15.3% for Social Security and Medicare combined. There’s no way to split it.
Electing S-corp status changes that. You become an employee of your own company and pay yourself a salary, which is subject to the same 15.3% in payroll tax. The rest of the profit comes out as distributions, which are not subject to that 15.3%. With $150,000 of profit and a $70,000 salary, the savings come to about $10,500 a year, roughly 13% of the $80,000 you take as distributions instead of salary. That is a little under the full 15.3%, because self-employment tax is figured on 92.35% of profit. The percentage is lower when your salary is a bigger share of profit, and lower again once profit passes about $200,000, because the Social Security part of the tax stops at the wage base ($184,500 in 2026).
That’s the entire game — and it’s why the salary number is the one that matters.
The savings only count if your salary is reasonable
The calculator makes one thing obvious: drag your salary down and the savings go up. That’s exactly the temptation the IRS watches for. The distributions avoid FICA only because you first paid yourself reasonable compensation for the work you do. Set the salary too low and the IRS can reclassify your distributions as wages, erasing the savings and adding back taxes, interest, and penalties.
So there is no fixed-percentage shortcut, whether 40% or 60% of profit: the 60/40 rule is a myth. The defensible number is the market wage for your actual duties, and it’s the figure that decides how much of the savings above are real. That number is exactly what WageProof calculates and documents, using BLS wage data for your role and local wage area. The reasonable salary calculator shows how.
S-corp tax savings FAQ
The savings come from self-employment tax. As a default LLC you pay 15.3% self-employment tax (Social Security + Medicare) on about 92% of your net profit, with the Social Security part stopping at the annual wage base. As an S-corp, only your salary is subject to that 15.3%; the profit you take as distributions is not. With $150,000 of profit and a $70,000 salary, that saves about $10,500 a year, roughly 13% of the profit taken as distributions (a bit under the full 15.3%, because self-employment tax is figured on 92.35% of profit). The percentage is lower when your salary is a bigger share of profit, and lower again once profit passes about $200,000. The savings are often several thousand dollars, but they depend entirely on a salary you can defend.
It's the self-employment tax you'd owe as a default LLC minus the FICA you'd owe on just your salary as an S-corp. The LLC figure applies Social Security (12.4%, capped at the annual wage base) and Medicare (2.9%) to 92.35% of net profit; the S-corp figure applies the same rates to your salary only. The difference is your estimated savings.
Salary vs. distribution, explained →It's a good estimate of the payroll-tax difference, using current Social Security and Medicare rates. It deliberately keeps things simple — it compares gross payroll taxes and doesn't model state taxes, the 0.9% Additional Medicare surtax at higher incomes, the QBI (§199A) deduction, or the income-tax deductibility of the employer-side payroll tax. That last one is somewhat larger on the LLC side, so your true benefit after income tax is usually a bit lower than the figure shown. Treat the number as a planning estimate, not a filed return.
Yes, and this calculator assumes the salary you enter is reasonable. The savings exist only because distributions avoid FICA, and that's only allowed if you first pay yourself reasonable compensation for the work you do. Lowering your salary raises the savings on paper, but if the salary is below market, the IRS can reclassify distributions as wages. The savings are real only if the salary is defensible.
What reasonable compensation means →Roughly, when your profit is high enough that the FICA you save on distributions outweighs the cost of running payroll, filing an 1120-S, and documenting a reasonable salary. There's no magic threshold. The bigger the gap between your net profit and a reasonable salary for the work, the more you save, because that gap is what gets taken as FICA-free distributions. Use the calculator above to see your own number.
How this calculator works
The formula: annual savings = the self-employment tax you’d pay as a default LLC − the FICA you’d pay on your S-corp salary.
- As an LLC: 12.4% Social Security on 92.35% of net profit (up to the Social Security wage base) + 2.9% Medicare on 92.35% of net profit (no cap).
- As an S-corp: 12.4% Social Security on your salary (up to the wage base) + 2.9% Medicare on your salary. Distributions carry no FICA.
Rates (2026): Social Security 12.4% up to the 2026 wage base of $184,500, Medicare 2.9%, and the Schedule SE 92.35% net-earnings factor. (The wage base changes each year; the rates are set by statute.)
What it leaves out — so treat the figure as a planning estimate, not a filed return: state and local taxes; the 0.9% Additional Medicare surtax at higher incomes; the income-tax deductibility of the employer-side payroll tax (somewhat larger on the LLC side, so your true after-income-tax benefit is usually a bit lower than shown); the QBI (§199A) deduction; and the cost of running payroll and filing an 1120-S.
It assumes your salary is reasonable. Lowering the salary raises the number on screen, but the savings are only real if the salary is defensible — which is exactly what WageProof documents.
Sources. The rates and the 2026 wage base match IRS Topic 751 and the SSA Social Security wage base page; the 92.35% factor matches IRS Topic 554.
Estimate, not tax advice. This calculator estimates a payroll-tax difference using current federal rates; it does not account for your full tax situation, state taxes, or whether the S-corp election is right for you. Consult a qualified tax professional before electing S-corp status or setting your compensation.