Calculate how much you save with S-Corp election vs single-member LLC. See SE tax reduction, payroll costs, and net savings. Free calculator, no signup.
A single-member LLC pays 15.3% self-employment tax on all net profit. An S-Corp lets you split income into a reasonable salary (SE tax applies) and distributions (no SE tax). On $200,000 net income with a $100,000 salary, you save $15,300 in SE tax — minus $3,000-$5,000 in S-Corp costs. Net savings: $10,000-$12,000/year. The crossover point is typically $80,000-$100,000 in net profit.
As a single-member LLC, all $200,000 profit flows through as self-employment income. SE tax: $200,000 × 15.3% = $30,600. As an S-Corp with $100,000 salary: SE tax on salary only = $15,300. Distributions of $100,000 = $0 SE tax. Annual SE tax savings = $15,300. Annual extra costs: payroll service ($500-$1,500), bookkeeper ($1,200-$3,600), extra tax prep ($800-$2,000). Net annual savings: $7,000-$12,000.
The IRS requires S-Corp owner-employees to pay themselves a 'reasonable salary' — roughly what the market pays for your services. Paying yourself $30,000 salary while taking $170,000 in distributions on $200k profit is a red flag. IRS scrutinizes ratios below 40% salary. A reasonable benchmark: salary = 40-60% of net profit for most service businesses.
S-Corp is a tax election (Form 2553), not a new legal entity. Annual requirements: run payroll (W-2 wages quarterly), file Form 1120-S (~$800-$1,500 to prepare), file quarterly payroll taxes. Total annual overhead: $3,000-$5,500 for most solopreneurs. Break-even on net profit: approximately $80,000-$100,000.
The rule of thumb: S-Corp saves money once net self-employment income exceeds $80,000-$100,000/year. Below that threshold, annual costs typically exceed the SE tax savings. At $150,000 net profit, expect net savings of $8,000-$12,000/year after all costs.
Yes — this is one of the most common tax optimization strategies for freelancers and solopreneurs. File IRS Form 2553 to elect S-Corp taxation while keeping your LLC legal structure. The deadline is March 15 to elect for the current tax year.
No exact formula, but the IRS expects compensation comparable to what a non-owner employee doing the same work would earn. Resources: BLS Occupational Employment Statistics, Robert Half salary guides. Document your rationale in writing to protect against IRS scrutiny.
Yes — Social Security benefits are based on W-2 wages paid over your career. By paying yourself a lower salary via S-Corp, you may reduce future Social Security benefits. For someone near retirement with lower lifetime earnings, consult a financial planner before electing S-Corp.
At $120,000 net profit with a $70,000 salary: SE tax savings = $50,000 × 15.3% = $7,650. Less annual costs ($3,500-$5,000) = net savings $2,650-$4,150. It's marginal. If your state has no S-Corp filing fees and you already have a bookkeeper, the math tips in S-Corp's favor. At $150,000+, the answer becomes clearly yes.
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