S-Corp vs Sole Proprietor Calculator
See how S-corp status can cut self-employment tax by splitting profit into a reasonable salary and a distribution.
Want to understand the concept, not just the number? Read The Self-Employed Business Owner Guide .
How it's calculated
A sole proprietor pays self-employment tax, 15.3 percent, on all of their net profit. Electing S-corp status changes the math. You pay yourself a reasonable salary as a W-2 employee, which is subject to payroll tax, and take the rest of the profit as a distribution, which is not. The self-employment tax you avoid on that distribution is the savings.
Take the default. On 150,000 dollars of profit, a sole proprietor owes about 21,194 dollars in self-employment tax. As an S-corp paying a 90,000 dollar salary, payroll tax applies only to that salary, about 13,770 dollars, and the remaining 60,000 dollar distribution escapes it. That is roughly 7,424 dollars saved for the year, and the saving grows as profit rises above the salary.
The catch is the word reasonable. The IRS requires the salary to reflect what your work is actually worth, and paying yourself too little to dodge more tax invites an audit. There is also real cost and hassle in running payroll and filing a separate corporate return, often over a thousand dollars a year, so the election usually makes sense only once profit is comfortably above a reasonable salary. Compare your own numbers here, then weigh the saving against the added complexity.
Assumptions
- A sole proprietor pays self-employment tax on all net profit. An S-corp pays payroll tax only on the salary, and the distribution avoids it. The saving is the tax on the distribution.
- This ignores the added cost of running payroll and filing a corporate return, often 1,000 to 2,000 dollars a year, and assumes the salary is defensible to the IRS.
Last updated: 2026-08-08 · Tax year 2026
These assumptions follow our general methodology.
Frequently asked questions
How does an S-corp save on taxes?
By splitting your profit into a salary and a distribution. Payroll tax applies to the salary but not the distribution, so the self-employment tax you would have paid on the distribution portion is saved. Income tax is unchanged, since both the salary and distribution are still taxed as income.
What is a reasonable salary for an S-corp?
It is what you would pay someone else to do your work, based on your role, experience, and industry. The IRS scrutinizes low salaries meant to dodge payroll tax. A common approach is to look at market pay for your job, not simply the smallest number you can justify.
When is an S-corp worth it?
Generally once profit is comfortably above a reasonable salary, so there is a meaningful distribution to shield. Below that, the payroll and filing costs can outweigh the savings. Many advisors suggest profit in the low six figures as a rough starting point.
Does an S-corp change my income tax?
No. The salary and distribution are both taxed as ordinary income, so your income tax is about the same. The savings comes only from the payroll and self-employment tax on the distribution. It also does not change your QBI deduction eligibility on its own.