As a sole proprietor
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total tax
As an S-corp
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tax plus entity tax and costs
Annual saving from electing
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How the saving changes with salary
Highest salary share where it still pays
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Profit where it starts paying at this salary share
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Where the numbers come from
| Item | Sole prop | S-corp | Saving |
|---|---|---|---|
| Total |
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Methodology
What the election changes
A sole proprietor pays self-employment tax (IRC §1401) of 15.3% on 92.35% of net profit: 12.4% Social Security up to the $184,500 wage base plus 2.9% Medicare with no cap, and 0.9% Additional Medicare above the §3101(b)(2) threshold. Half of SE tax is deductible (§164(f)). An S corporation pays its owner a salary subject to ordinary FICA on both sides, and the remaining profit passes through on Schedule K-1 free of payroll tax. The saving is payroll tax avoided on the distribution, less what the election costs.
What the election costs
- Reasonable compensation. The IRS and courts require salary comparable to market pay for the work (Rev. Rul. 74-44; Watson v. United States, 8th Cir. 2012). Setting it too low is the audit risk; this is why the slider is the most important input.
- Smaller QBI deduction. Wages are not qualified business income (§199A(c)(4)), so the 20% deduction shrinks by 20% of the salary. Above $201,750 of taxable income ($403,500 joint) the W-2 wage limit phases in over $75,000 ($150,000 joint), where paying yourself wages can instead help. Specified service businesses lose the deduction entirely above the range. A $400 minimum deduction applies with at least $1,000 of QBI.
- Entity-level taxes. Several states tax S corporations directly (California 1.5% with an $800 minimum, Tennessee 6.5% excise, Illinois 1.5% replacement tax, and various minimum taxes). The state-specific amount appears in the table.
- Administration. Payroll filings and a separate Form 1120-S. Defaults of $600 and $1,000 a year are editable.
- Not modeled: reduced Solo 401(k) employer contributions (25% of salary instead of 20% of net SE income), the SE health insurance deduction mechanics, state unemployment insurance on owner wages (small, varies), and the SALT-cap workaround some states offer S-corps through pass-through entity taxes.
Assumptions
- Standard deduction only; no itemizing, credits, AMT, or net investment income tax. Other household income is treated as ordinary income.
- The owner has no other W-2 wages of their own (which would use up Social Security wage base and change the answer).
- State income tax uses the same AGI as federal; most states do not allow the QBI deduction. Single-filer schedules are used for head-of-household and separate filers, and deduction phaseouts are not modeled.
- Entity tax is computed on net income after salary, employer payroll tax, and costs.