S-corp reasonable salary calculator

Split salary from distributions and see the payroll-tax saving.

An S corporation can cut your self-employment tax — but only if you pay yourself a "reasonable" salary and take the rest as distributions.

Enter your net profit and the salary you would pay yourself. The calculator shows the annual saving versus staying a sole proprietor.

What an S-corp actually changes

An S corporation is not a way to pay less income tax. It is a way to pay less self-employment tax. As a sole proprietor, you pay SE tax (Social Security plus Medicare, 15.3% up to the wage base, plus 0.9% extra Medicare above a threshold) on 92.35% of your net profit. As an S corp, you split your income into a salary and distributions: the salary is subject to payroll tax, but the distributions are not. Everything is still ordinary income taxed the same way — only the payroll/SE tax differs.

That split is the entire game. The lower your salary (within reason), the less payroll tax you pay. The calculator shows the annual saving for the salary you enter versus what you would owe as a sole proprietor.

The reasonable-salary rule

You cannot pay yourself $1. The IRS requires a "reasonable salary" — what you would have to pay someone else to do the work you do. For a freelance developer, writer, or designer, that is usually a real market rate for the role, not a token figure. Set it too low and the savings evaporate in an audit; set it too high and you lose most of the benefit. Most solo operators land the salary somewhere between 40% and 70% of net profit, depending on how much of the work is genuinely "the owner" versus repeatable delivery.

The calculator flags you when the salary you enter is above the profit attributable to your own labour (92.35% of profit). Above that line an S corp costs more in payroll tax than a sole proprietorship costs in SE tax, so the election would backfire.

The saving, in dollars

The saving equals the SE tax on 92.35% of profit minus the payroll tax on your salary. Because both are 15.3% up to the Social Security wage base, the saving is roughly 15.3% of the gap between (0.9235 × profit) and your salary. On a six-figure profit with a salary around half, that gap is tens of thousands of dollars a year — which is why S corps are popular once income climbs. The self-employment tax calculator shows the sole-proprietor side of the comparison directly.

What the S-corp does NOT save

Distributions are still taxed as ordinary income at your marginal rate. The S corp does not lower your income tax bill — it only removes the 15.3% SE/payroll tax from the portion you take as distributions. Do not expect a lower bracket or a smaller federal bill; expect a smaller payroll-tax line. State treatment varies, and a few states do not recognise the S-corp election at all, so the real-world benefit depends on where you live.

Costs and friction

An S corp is not free. You will run payroll (even for one person), file a corporate return (Form 1120-S) on top of your personal return, possibly pay state franchise fees, and keep cleaner books. Those costs eat into the saving, so the election only makes sense past a profit threshold — commonly cited around $40,000 to $60,000 of net profit, though the right number depends on your state and your accountant's fees. Below that, the admin often costs more than the tax saved.