LLC vs S-Corp Tax Savings Calculator
Calculate how much self-employment tax you save by electing S-Corp status — and whether the savings exceed the added administrative costs.
How the S-Corp Tax Arbitrage Works
As an LLC or sole proprietor, your entire net profit is subject to self-employment tax (15.3%). With an S-Corp election, only your salary is subject to FICA. The remaining profit passes through as a distribution, which is not subject to SE tax. This is the fundamental arbitrage — shifting income from SE-taxable salary to non-SE-taxable distributions.
Example: $150,000 Profit
As an LLC: $150,000 × 92.35% × 15.3% ≈ $21,200 in SE tax. As an S-Corp with a $75,000 salary: $75,000 × 92.35% × 15.3% ≈ $10,600 in FICA — saving $10,600. Minus $2,000 in admin costs, the net savings is $8,600/year. After five years, that's $43,000 in real savings.
The Reasonable Salary Requirement
The IRS requires S-Corp owners to pay themselves a reasonable compensation before taking distributions. Setting your salary too low is a known audit trigger. A good benchmark: match what you'd pay a third-party employee to do your job, supported by industry salary data from BLS, Glassdoor, or similar sources.