An S-Corp isn't a separate business — it's a tax election. You're still an LLC (or corporation) in the eyes of your state. You just told the IRS you'd like your profit to flow through differently. Here's what actually changes.
Each pay period, your business cuts you a real W-2 paycheck with withholdings and a 941 filing. The IRS calls this your "reasonable compensation." Skipping it or making it a token amount is the fastest way to lose the audit.
Anything left after your salary becomes a "distribution." It's still taxed as ordinary income — but the 15.3% Social Security and Medicare combo doesn't apply. That's where the savings live.
A separate 1120-S return. Quarterly payroll filings. A balance sheet on Schedule L if you cross $250k. Most owners outsource this, which means a real monthly bill — the line item the calculator above is asking about.
The single largest enforcement target in S-Corp examinations: owners who pay themselves a $20,000 salary on $300,000 of profit to dodge payroll tax. Don't be that person.
The IRS standard, from Treas. Reg. §1.162-7 and reinforced by the Watson v. Commissioner case, is what someone else would pay you to do the same work if you weren't the owner. In practice, examiners look at:
Practical rules of thumb we've seen survive examination: for personal-service businesses (consulting, design, law, medicine) salaries below 50% of profit start drawing scrutiny. For businesses with real capital, inventory, or staff doing the actual work, the owner's salary can legitimately be a smaller share — but it still can't be zero.
If you want a defensible figure, third-party services like RCReports and BizStats produce reasonable-comp reports built from BLS and compensation-survey data. CPAs often run one annually and keep it in the file as audit insurance.
The 20% Qualified Business Income deduction interacts with S-Corp election in ways that have flipped real owners from "saving $8k" to "owing $4k" between the napkin math and the actual return.
How QBI changes under S-Corp. Your W-2 salary from the S-Corp is not qualified business income — only the distributions are. So electing S-Corp shrinks the slice of your income eligible for the 20% deduction.
The SSTB trap. If your work is a "Specified Service Trade or Business" — consulting, law, health, financial services, performing arts, athletics — your QBI deduction phases out completely above the income threshold (about $241,950 single / $483,900 married jointly in 2025). For SSTB owners in this range, electing S-Corp can wipe out a QBI deduction worth more than the SE-tax savings ever were.
The wage-limit angle. Above the threshold for non-SSTBs, your QBI deduction is capped at 50% of W-2 wages paid. Counterintuitively, this is one situation where paying yourself a higher S-Corp salary can preserve the deduction — but it's also a situation where you should be paying a CPA, not a website.
This calculator models all three cases. The break-even threshold shown above already accounts for whether you're an SSTB and whether you're past the income phaseout.
Yes, in a sense — your "paycheck" becomes the salary portion, with normal payroll withholdings. The rest comes through as distributions, which you can take on whatever schedule you want (monthly, quarterly, ad-hoc). Total cash to you is the same; the timing and tax treatment are different.
}, { q: "When do I have to file Form 2553?", a: <>New entities: within 75 days of formation to apply to the current tax year.
Existing entities: by March 15 of the year you want the election to apply to. Miss it, and the election waits until next year — though the IRS does grant late-election relief under Rev. Proc. 2013-30 if you have reasonable cause and file within 3 years 75 days.
}, { q: "Can I undo an S-Corp election?", a: <>Yes, by filing a statement of revocation, but the IRS won't let you re-elect S-Corp status for 5 years afterward. Treat the decision as a multi-year commitment.
}, { q: "Do I need a separate bank account?", a: <>You needed one for the LLC already if you wanted the liability shield. With S-Corp election, the operational answer is the same — but the hygiene matters more, because payroll, distributions, and reimbursements all need to be traceable for the 1120-S return.
}, { q: "What about health insurance?", a: <>S-Corp owners holding more than 2% of shares get a unique treatment: health premiums paid by the corporation are added to your W-2 wages (Box 1) but you take an above-the-line self-employed health insurance deduction to wash it out. Net effect: same as before, but the bookkeeping is fiddly. Your payroll provider should know how to do this — confirm before signing up.
}, { q: "How does this affect my retirement contributions?", a: <>Solo 401(k) limits change. As a sole proprietor, your contribution base is your full SE income; as an S-Corp owner, it's only your W-2 salary. Set the salary too low and you cap your own retirement contributions. The calculator factors this in when you set the retirement % field above.
}, { q: "I have a regular W-2 job too. Does that change anything?", a: <>Yes — and usually in S-Corp's favor at higher incomes. If your W-2 wages already exceed the Social Security wage base ({'$176,100'} in 2025), you've maxed out the 12.4% SS portion, so the marginal SE tax on additional self-employment income is just 2.9% Medicare. The calculator accounts for your other W-2 wages in the form.
}, { q: "Should I trust this number?", a: <>Trust it as a directional estimate, not a filing position. Tax law has more edge cases than a calculator can model — state-level pass-through entity tax elections, multi-state apportionment, fringe benefit rules, accumulated-adjustments accounting, you name it. If the calculator says you'd save $1,200 a year, the realistic range is probably $500 to $2,000, and a real CPA should be the one signing off before you file Form 2553.
}, ]; function FAQ() { return (