Estimator
What would an S‑Corp election actually save you?
Most S‑Corp calculators stop at payroll tax, which is about half the answer. This one also models the qualified business income deduction on both sides, because above the Section 199A threshold that deduction is capped at half your W‑2 wages, and a sole proprietor pays none.
Your numbers
Refine the estimate
Defaults are reasonable, but these are what move the answer most.
Net annual difference
–
- Self-employment tax, sole proprietor
- –
- Payroll taxes, S‑Corp
- –
- Payroll tax difference
- –
- QBI deduction, sole proprietor
- –
- QBI deduction, S‑Corp
- –
- Income tax effect of the QBI change
- –
- Less cost to run it
- –
- Less state fee
- –
Read this part
What this still leaves out
A number without its assumptions is worse than no number. Here is what the model does not reach.
- Your actual brackets. Income tax is applied at the single marginal rate you enter, not run through the brackets, so a change large enough to cross a bracket will be slightly off.
- The Section 199A phase-in. Between the threshold and the top of the phase-in range the wage cap applies gradually. This model switches it on at the threshold, which is conservative.
- State income tax. Only the fixed state fee is modelled. States that tax pass-through income differently from wages will shift the answer.
- Payroll timing and reasonable salary risk. The model takes your salary as given. Whether it is defensible is a judgment call, not arithmetic.
- Retirement plan interaction. A solo 401(k) contribution limit depends on W-2 wages in an S-Corp and on net profit as a sole proprietor, which can outweigh everything here.
The retirement point is the one that most often changes a close call. If you are contributing meaningfully to a plan, the salary that maximizes the S‑Corp benefit is usually not the lowest defensible one.
The mechanism
Why payroll tax is only half the answer
As a sole proprietor essentially all net profit carries self-employment tax: 12.4% for Social Security up to the wage base, plus 2.9% for Medicare with no ceiling. An S‑Corp splits profit into a salary, which carries the same payroll taxes, and a distribution, which does not. That difference is what every simple calculator shows.
The qualified business income deduction runs the other way, and it is often larger. It is worth 20% of qualifying business income, but once household taxable income passes the Section 199A threshold the deduction is capped at 50% of the W‑2 wages the business pays.
A sole proprietor pays no W‑2 wages. So above that threshold the cap is 50% of nothing, and the QBI deduction disappears entirely. An S‑Corp paying you a real salary keeps a deduction. For a high earner that can be worth more than the payroll tax saving, and it is why the two treatments have to be compared on total tax rather than on payroll tax alone.
It also means the optimum salary is not simply the lowest one you can defend. Below the threshold, less salary is better. Above it, raising the salary raises the wage cap, and the deduction it unlocks can outrun the extra payroll tax up to a point.
Common questions
Before you act on the number
What you would have to pay someone else to do your job, given your role, hours, experience, and what the business earns. The IRS publishes no formula but does challenge salaries that are obviously low relative to distributions. In practice we look at industry compensation data and at how much of the profit comes from your time rather than from capital or staff, then document the reasoning so it holds up if anyone asks.
Above the Section 199A threshold the qualified business income deduction is limited to 50% of the W-2 wages your business pays. Raising your salary raises that cap, and the extra deduction can be worth more than the additional payroll tax it costs. Below the threshold the limitation does not apply, so the usual logic holds and a lower defensible salary wins. That reversal is exactly why a payroll-only calculator misleads high earners.
Substantially. Social Security tax stops at the annual wage base, and wages from a job or a spouse's job use that base first. If those wages already exceed it, the Social Security portion of the saving is gone entirely and only the 2.9% Medicare difference remains, which is usually not enough to justify the cost of running an S-Corp.
It can dominate the decision. Solo 401(k) employer contributions are calculated from W-2 wages in an S-Corp and from net self-employment earnings as a sole proprietor, so the structure changes how much you can put away. An owner maximizing contributions often wants a higher salary than pure payroll tax logic suggests. This model does not attempt it, and it is one of the first things we look at in a real review.
No. It is a marginal-rate model built on stated assumptions, not tax advice, and it simplifies brackets, the Section 199A phase-in, and state treatment. Use it to work out whether the question is worth asking. If the number is anywhere near the cost of running the election, it is worth checking against your actual return.
Bring your number to a conversation.
We will run it against your actual return, including the retirement and salary questions this cannot reach.