S corp tax calculator: does electing actually save you money?

What this counts that most calculators don't

• The QBI deduction your salary gives up. As a sole proprietor, nearly all your profit can count toward the 20% qualified business income deduction. As an S corporation, your salary doesn't count. On a $70,000 salary that's $14,000 of deduction gone — often thousands of dollars of tax, and the reason many "S corp savings" figures are too high.
• The Social Security wage base. Social Security tax stops at $184,500 of earnings in 2026. Above that, avoiding self-employment tax saves only the 2.9% Medicare part, so the saving grows much more slowly than profit.
• The cost of running it. Payroll every pay period and a separate corporate tax return, plus California's S corporation tax if you're there.
• The deductions on both sides. Half of self-employment tax is deductible; so is the employer half of payroll tax, as a business expense. Both are in the income-tax figures.

At what income is an S corporation worth it?

There's no single number, because it depends mostly on the salary you'd pay yourself — the calculator shows the break-even profit for yours. From the same arithmetic, at a 22–24% federal rate and 5% state: with a salary between $40,000 and $70,000 and no QBI deduction, an S corporation starts to pay at roughly $60,000 to $92,000 of profit. With the full QBI deduction it takes more — roughly $75,000 to $120,000. Below that, payroll and the second return cost more than the tax saved.

Is there a 60/40 or 70/30 salary rule?

No. Neither the tax code nor the regulations set a percentage. The rule is that an owner who works in the business must be paid reasonable compensation for that work — roughly what you'd pay someone else to do it — before taking distributions. The split that follows depends on the business, not a ratio. Set the salary with your CPA; the calculator only shows what a given salary does.

Who can elect

A business can be taxed as an S corporation only if it:

• is a domestic corporation, or an LLC that elects to be taxed as one;
• has 100 or fewer shareholders;
• has only eligible shareholders — individuals who are US citizens or residents, estates, and certain trusts, not partnerships or corporations;
• has one class of stock, so every share has the same rights to distributions and liquidation proceeds.

An LLC can elect without changing its legal form. The election is Form 2553, due within two months and 15 days of the start of the tax year it's to take effect; the IRS has a relief procedure for late elections.

What you give up

• Flexible allocations. Profit and loss follow ownership exactly; special allocations in an operating agreement end.
• Property coming back out. Distributing an appreciated asset, like a building, is taxed as if it were sold.
• Loans in your basis. A partner's basis includes a share of the business's debt; a shareholder's doesn't, which can limit deductible losses.
• A basis step-up. A partnership can adjust its property's basis when an owner dies or sells; an S corporation can't.

When it doesn't fit

• The income is rent. Rental income isn't subject to self-employment tax, so an S corporation has nothing to save — and holding real estate in one makes it expensive to take out later.
• The profit is small. The running costs outweigh the saving.
• No owner works in the business. Then its income isn't self-employment income for anyone.
• An owner is a company, a partnership or a nonresident alien. The business can't elect at all.

Whether it fits your business — and what salary is reasonable for you — is a question for your CPA or tax attorney before you file anything.