Electing S-corp status lets only a “reasonable salary” be subject to payroll tax, with the rest taken as a distribution free of self-employment tax — but the salary has to be genuinely reasonable, not artificially low.
How it works
A sole proprietor’s SE tax applies the 15.3% rate to 92.35% of net income. An S-corp instead applies 15.3% payroll tax only to the reasonable salary chosen, with the remaining profit taken as a distribution outside the payroll tax base.
What this does not include
This does not include the Social Security wage base cap, the Additional Medicare Tax, or the administrative costs of running payroll and filing a separate S-corp return — all of which shrink the real-world savings somewhat versus this simplified comparison.
How to use this calculator
- Enter net business income and a reasonable salary figure.
Frequently asked questions
What counts as a “reasonable” salary?
The IRS expects it to reflect fair market value for the work performed, based on duties, experience, and what comparable businesses pay for similar roles — setting it artificially low is a well-documented audit trigger.
At what income level does S-corp election typically pay off?
Many practitioners cite roughly $60,000-$80,000 of net profit as the point where the payroll tax savings start to outweigh the added administrative cost, growing larger as profit rises further.
Does an S-corp election eliminate income tax on the distribution?
No — distributions still owe ordinary income tax; the savings here are specifically on the 15.3% self-employment/payroll tax portion, not income tax generally.
