S-Corp Tax Calculator (2026) — S-Corp vs LLC Savings & Reasonable Compensation

When your business profit is high enough (typically $60-80K+) that the SE tax savings on the distribution portion outweighs the ~$2,500/year overhead of running payroll, filing Form 1120-S, and documenting reasonable compensation. Below that profit threshold, the overhead exceeds the savings. The exact crossover depends on your reasonable-comp number and state-specific costs.

Roughly 15.3% × (profit minus reasonable compensation), minus $2,500-$3,500/year of overhead. At $120K profit with $60K reasonable comp, that's ~$9,180 saved minus ~$2,500 overhead = ~$6,680 net. At $250K profit with $90K reasonable comp, savings climb to ~$24K gross / ~$21K net. Above ~$184.5K of comp, Social Security portion caps out and only Medicare (2.9%) applies on incremental distribution — savings rate drops.

The IRS requires S-corp owners-employees to pay themselves W-2 compensation that's 'reasonable' relative to industry norms and their actual contribution. Typical range: 30-60% of profit for most professional services. Use BLS occupational data, RC Reports, or peer-firm surveys as defensible benchmarks. Setting it too low to maximize distributions is one of the most common S-corp audit triggers — the IRS can reclassify distributions as wages and assess back payroll taxes + penalties.

File IRS Form 2553 (Election by a Small Business Corporation) within 2 months and 15 days of the start of the tax year you want the election to take effect. Late elections are possible with reasonable cause under Rev. Proc. 2013-30. Work with a CPA — the election is a multi-year commitment and reversing it is restricted to a 5-year cooling-off period under §1362(g).

Annual payroll administration (W-2 for owner, quarterly 941s, year-end W-3); Form 1120-S filing (more complex than Schedule C); reasonable-comp documentation burden; one class of stock requirement; limit of 100 shareholders, all US persons; state-specific costs (California's $800 franchise tax + 1.5% S-corp tax; some states tax S-corps as C-corps). For low-profit businesses, the overhead exceeds the SE-tax savings.

Yes. LLCs are tax-flexible entities — they can elect S-corp tax treatment by filing Form 8832 (entity classification) and Form 2553 (S election), or in many cases Form 2553 alone (which is treated as a deemed entity-classification election). The LLC remains a legal LLC for state law purposes (operating agreement, limited liability) but files Form 1120-S federally. This is the most common S-corp structure for small businesses.

S-corps are pass-through entities — income flows to owners' personal returns, taxed once. C-corps pay corporate tax (21% federal flat rate) at the entity level, then shareholders pay tax again on dividends — 'double taxation.' For most small businesses with all-US owners and under 100 shareholders, S-corp is the better structure unless you're raising VC, have non-US owners, or plan to reinvest profits at the entity level long-term.

Partially. S-corp distributions qualify for the §199A 20% QBI deduction (subject to wage/UBIA limits above the income threshold). But the W-2 wages you pay yourself reduce QBI — so over-paying yourself to chase QBI wage limits while minimizing self-employment tax savings is a balancing act. CPAs typically model both scenarios. For specified service trades (SSTBs — law, health, consulting), QBI fully phases out above the 2026 income threshold (~$241,950 single / ~$483,900 MFJ projected), making SE-tax savings the dominant variable.