S-Corp vs Sole Prop: 2026 Tax Savings Calculator

How this calculator works

The calculator compares your total federal tax bill under two scenarios with identical revenue and expenses. As a sole proprietor (or single-member LLC taxed as one), all of your net profit flows through to your personal return and is subject to both federal income tax and the full 15.3% self-employment tax on the first $180,000 of earnings (the 2026 Social Security wage base estimate), then 2.9% Medicare on everything above.

Under an S-Corp election, you split that net profit into two buckets: a W-2 salary you pay yourself (subject to FICA, which is the employer-employee equivalent of SE tax) and a distribution of the remainder (subject to income tax but not SE tax or FICA). That FICA-free distribution is where the savings come from. We then subtract roughly $2,000/year for the realistic cost of running an S-Corp: payroll software, an extra tax return (Form 1120-S), and the bookkeeping rigor it requires.

What counts as “reasonable salary”?

The IRS requires S-Corp owners who perform services for the business to pay themselves a salary that’s reasonable for the role and industry. Pay yourself too little and you’re effectively dodging payroll taxes, which the IRS audits aggressively and can recharacterize distributions as wages (with back taxes and penalties).

There’s no fixed formula, but defensible reasonable salaries usually fall in one of two ranges: roughly 40–60% of net profit for service businesses where the owner does most of the work, or whatever the BLS data says a comparable W-2 employee in your role and metro would earn. The slider in this calculator lets you stress-test how your savings change as you move the salary up or down within that band.

When the S-Corp election doesn’t make sense

The math breaks down at the low end. If your net profit is under roughly $40,000–$60,000, the S-Corp’s $2,000/year compliance cost eats most or all of the FICA savings — you’re paying $2,000 to save $1,500. Below that threshold, stay a sole proprietor.

State tax can also flip the answer. California charges a separate 1.5% S-Corp tax on net income (minimum $800/year). Tennessee, New York City, and a handful of other jurisdictions add their own S-Corp-specific taxes that aren’t in this calculator. And if most of your income would qualify for the 20% QBI deduction (§199A) as a sole prop, electing S-Corp can shrink that deduction because your W-2 wages are no longer pass-through income — in some scenarios the QBI hit outweighs the FICA savings.

What this calculator doesn’t include

• State income taxes and state-specific S-Corp taxes
• Alternative Minimum Tax (AMT)
• Net Investment Income Tax (NIIT)
• The §199A QBI deduction
• Self-employed health insurance and retirement contribution interactions
• Your specific deductions, credits, or other income sources

Assumptions: $2,000/year S-Corp compliance cost; $180,000 Social Security wage base (2026 estimate); $10,000– $1,000,000 revenue range; single filer.