Business structure comparison
Is an S corporation worth the extra payroll and administration?
Compare the same business profit under sole-proprietor taxation and an S-corporation scenario. The useful question is how much remains after a supportable owner salary, both sides of payroll tax, and the extra costs of operating the corporation.
An LLC is a legal entity, while S-corporation status is a tax election. This tool models a sole proprietor or disregarded single-member LLC against a one-owner S corporation; it does not choose an entity or submit an election.
How to use this tool
Start with comparable profit
Subtract the business expenses shared by both choices before entering profit. Enter extra corporation costs separately.
Support the owner salary
Use duties, experience, time spent, and compensation for comparable work. A percentage slider is only a scenario assumption.
Include your other wages
The owner and corporation have different Social Security limits. Add spouse Medicare wages for a joint return.
Test deductions and profit changes
If you have an estimated marginal rate and QBI deduction difference, add them explicitly. Review the full bounded range for reversals.
Example: $150,000 profit and a $70,000 salary
Assume no outside wages, $3,000 in extra administration, $300 in other employer payroll costs, and no state entity costs. Sole-prop regular self-employment tax is $21,194.33. S-corp Social Security and Medicare total $10,710 across employer and employee, and extra costs are $3,300. The S-corp payroll-and-cost advantage is $7,184.33 before ordinary income tax.
With a 24% marginal ordinary income-tax assumption and zero QBI deduction difference, the smaller net deduction reduces that advantage by $466.12, leaving a modeled $6,718.21 difference. These amounts are rounded only for display; QBI is not automatically estimated.
Example: an outside job already reaches the wage base
Assume $100,000 business profit, a $50,000 owner salary, $184,500 of outside W2 wages, single filing status, and the same $3,300 extra costs. Sole-prop Social Security is zero; regular Medicare is $2,678.15 and incremental Additional Medicare is $691.65.
The corporation still pays $3,100 employer Social Security plus $725 employer Medicare. The owner owes $725 regular Medicare and $310.50 incremental Additional Medicare on the salary. The $3,100 excess employee Social Security withholding is credited in the annual model. After the $3,300 costs, sole proprietorship has a $4,790.70 advantage before ordinary income tax.
Reasonable compensation comes before distributions
The IRS requires compensation for services performed by an active shareholder-employee before treating payments as non-wage distributions. A low salary chosen solely to improve this result is not validated by the calculator. The salary and company costs must also fit the entered profit for this tool to show a funded comparison.
What still needs a complete tax projection?
- QBI eligibility, taxable-income limits, wage/property limits, and deduction changes
- Owner health-insurance and retirement contribution treatment
- Actual FUTA, state unemployment, franchise taxes, and election requirements
- Other self-employment businesses, business losses, basis, capital gains, and tax credits
For an active owner with standard U.S. payroll coverage. Assumes one business, no special payroll exemptions, and the same shared operating expenses. Verify salary, deductions, payroll costs, and eligibility with your tax professional before acting on an election.
Sources and further reading
- IRS: Publication 15 (2026) — 2026 wage base, payroll rates, and separate-employer payroll obligations.
- IRS: Self-employment tax — Standard net-earnings method, filing threshold, and half-SE-tax deduction.
- IRS: Excess Social Security tax — Employee credit when more than one employer withholds above the annual maximum.
- IRS: Additional Medicare Tax questions and answers — Filing-status thresholds and wage/self-employment coordination.
- IRS: S-corporation compensation — Reasonable compensation and shareholder health-coverage treatment.
- IRS: Form 1120-S instructions — Corporate income, wages, and business deductions.
- IRS: Qualified business income deduction — QBI considerations requiring a separate projection.
Frequently asked questions
Is there a fixed profit where everyone should elect S-corp taxation?
No. Salary, outside wages, employer payroll tax, administrative costs, deductions, and state rules all change the comparison. The profit sweep tests only your entered assumptions and selected range.
Does my outside W2 job eliminate S-corp Social Security tax?
It can eliminate additional employee Social Security liability after the annual credit, but the corporation generally still owes its own employer Social Security share. The table separates withholding, the modeled credit, and annual liability.
Does this calculate my total income-tax savings or QBI deduction?
No. The default compares payroll tax and incremental business costs. An optional sensitivity adjustment uses your entered marginal ordinary income-tax rate and QBI deduction difference. It does not replace a complete federal and state tax projection.
Can I use a 50/50 or 60/40 salary split?
You can explore a percentage scenario, but those splits do not establish reasonable compensation. Choose a supportable salary using the work performed and relevant compensation evidence, and review it as the business changes.