The question every six-figure consultant asks by year two
It arrives on a Tuesday, somewhere between the second good year and the third. You're reading your Schedule SE and doing arithmetic you don't like: every additional $10,000 of consulting profit costs $1,413 in self-employment tax, on top of income tax, forever, with no ceiling in sight — well, one ceiling, at $184,500 of earnings, and your growth plans intend to blow past it politely. A friend mentions their S-corp. You nod. You have no idea what it actually changes.
The mechanic, stripped of jargon: as a plain single-member LLC, all your profit pays the 15.3% self-employment tax. Elect S-corporation taxation and the business splits into two streams — a salary you run through payroll, paying normal FICA, and everything else, distributed free of payroll tax. The savings on the distribution slice are real. The costs are real too: payroll service, a second tax return, unemployment insurance, and a salary the IRS will scrutinize for reasonableness. Somewhere between those two forces sits a break-even point, and it is a genuine number, not a vibe.
This calculator finds it. Profit level, reasonable salary, cost assumptions in, break-even out — with the SE tax on one side, FICA plus admin on the other, and every figure computed from the published rates rather than a formation company's enthusiasm. It is an educational estimate, not a recommendation, and it runs entirely in your browser.
Running your break-even in five steps
The inputs mirror the decision itself:
Enter projected net profit
Revenue minus business expenses for the coming year — the number that would land on Schedule C or the LLC's books. Use the realistic year, not the hopeful one.
Set your reasonable salary
What the market pays someone doing your role full-time. The calculator applies FICA to this amount and lets the remainder flow as distributions. Being honest here is the entire ballgame — lowball salaries convert savings into audit exposure.
Enter W-2 wages already paid, if any
Existing wages (a spouse on payroll, employees) affect the Social Security wage-base interaction on the LLC side. Usually zero for solo shops.
Fill in the S-corp cost stack
Payroll service, extra accounting, state unemployment, workers comp, franchise fees. Defaults sit in the typical $1,500–$3,000 range; edit them to your actual quotes.
Read the break-even and the annual difference
The output shows both tax bills, the gross payroll-tax savings, the costs, the net annual advantage, and whether your profit level sits above or below the break-even line.
The two tax systems you're comparing
One clarification before the math, because the marketing from formation services muddies it constantly: an S-corp is not an alternative to an LLC. It is a tax election — Form 2553 — that your LLC (or a corporation) can make. The liability shield, the state filing, the operating agreement: unchanged. What changes is which chapter of the tax code applies. So the honest comparison is *your LLC as a disregarded entity* versus *your LLC electing S-corp taxation*, and that framing kills about half the confusing advice on the subject.
Side one: self-employment tax. The disregarded LLC pays SE tax on net profit: 15.3% on 92.35% of net earnings, split as 12.4% for Social Security up to the announced 2026 wage base of $184,500 and 2.9% for Medicare with no cap. On $100,000 of profit, that's $14,129.55 — computed in full on the self-employment tax calculator page. Half of it is deductible against income tax, which softens but does not erase the drag.
Side two: payroll plus distributions. The S-corp-electing LLC pays FICA on the salary — the same 15.3% combined, split between employer and employee halves on the W-2 — and nothing payroll-related on the distributions. On a $50,000 salary that's $7,650 of FICA: $3,825 shown on your pay stub, $3,825 paid by the business, which also deducts its half. The remaining $50,000 of profit flows to you as a distribution that carries no self-employment tax and no FICA, though it still counts as ordinary income for income tax.
The break-even formula the calculator implements: savings = 15.3% × (92.35% × net profit − reasonable salary), while both amounts sit under the Social Security wage base, minus the cost stack. The expression makes the shape obvious — the savings are proportional to the *gap* between your profit and your salary. Big gap, big savings. Small gap, the payroll costs win and the election is ceremony.
$100,000 profit, both ways, line by line
A solo marketing consultant projects $100,000 of net profit and can defend a $50,000 salary — the market rate for her role in her city. Here is the full comparison:
Input
Net profit: $100,000 · no W-2 wages · single owner
Output
Net earnings: 100,000 × 0.9235 = $92,350 Social Security (12.4%): $11,451.40 Medicare (2.9%): $2,678.15 Total self-employment tax: $14,129.55 Deductible half: $7,064.78 (worth ~$1,554 at a 22% marginal rate)
Input
Net profit: $100,000 · reasonable salary: $50,000 · distribution: $50,000
Output
Employer FICA (7.65% × 50,000): $3,825.00 Employee FICA withheld (7.65% × 50,000): $3,825.00 Total FICA: $7,650.00 Payroll tax on the $50,000 distribution: $0 Gross payroll-tax savings: 14,129.55 − 7,650.00 = $6,479.55
Now the costs, because the savings column is not the verdict. Payroll service for one employee runs $600–$1,500 a year depending on provider and state. The separate 1120-S return and bookkeeping cleanup commonly adds $1,000–$2,000 of accounting. State unemployment insurance applies to the first several thousand of wages — figure a few hundred dollars in most states, more in a few. Workers comp is required in some states even for owner-employees. Call the stack $1,500–$3,000 for a typical single-owner service business, and the net annual advantage at $100,000 of profit lands between roughly $3,500 and $5,000.
Worth having. Not life-changing. The number that matters more is the trajectory: the savings scale with profit while the costs stay nearly flat, so the election that nets $4,000 this year nets $12,000 at $200,000 of profit. The calculator exists to make that scaling visible rather than anecdotal.
Break-even at four profit levels
The same comparison across the profit range where the decision actually gets made. Salary assumptions escalate with profit, because a reasonable salary for full-time work has a floor:
| Net profit | Reasonable salary | LLC self-employment tax | S-corp FICA on salary | Gross payroll-tax savings | Typical cost stack | Net advantage |
|---|---|---|---|---|---|---|
| $60,000 | $40,000 | $8,477.73 | $6,120.00 | $2,357.73 | $1,500–$3,000 | ≈ break-even |
| $100,000 | $50,000 | $14,129.55 | $7,650.00 | $6,479.55 | $1,500–$3,000 | +$3,500–$5,000 |
| $150,000 | $70,000 | $21,194.33 | $10,710.00 | $10,484.33 | $1,800–$3,200 | +$7,300–$8,700 |
| $200,000 | $85,000 | $28,234.30 | $13,005.00 | $15,229.30 | $2,000–$3,500 | +$11,700–$13,200 |
Two details in that table deserve attention. The $200,000 row is where the LLC's self-employment tax finally touches the wage base — $184,700 of net earnings, of which the last $200 pays only Medicare — while the S-corp owner paid Social Security on just $85,000 of salary. The gap between the columns peaks in exactly this range, which is why the S-corp conversation reliably ignites in the second year of six-figure profits. Second, the salary assumption drives everything: shave the $150,000 row's salary to $60,000 and the savings grow by $1,530, but so does the reasonableness question on an owner doing full-time work.
Below the table's range the answer flips. At $40,000 of profit the reasonable-salary floor swallows most of it, the savings approach zero, and the election buys paperwork and nothing else. At $25,000 the LLC is not even paying meaningful attention. The practical rule of thumb the numbers support: below $60,000, stay default; $60,000–$80,000, compute carefully and decide on your tolerance for payroll; above $80,000, the arithmetic increasingly makes the case for itself.
The wage-base crossover: where the savings engine downshifts
Every dollar of profit below roughly $200,000 saves the S-corp owner 14.13 cents — 15.3% applied to the 92.35% conversion. Above that line, the engine cuts to a fifth of its power, and the reason is the Social Security wage base. At $184,500 of net earnings, which a profit of $199,783 produces, the 12.4% Social Security component stops accruing for the LLC owner. Additional profit owes only the 2.9% Medicare piece — 2.68 cents per dollar after the conversion factor — while the S-corp owner's FICA bill stays flat because the salary did not move.
| Net profit | LLC SE tax | S-corp FICA ($100,000 salary) | Gross savings | Savings on the NEXT $10,000 of profit |
|---|---|---|---|---|
| $150,000 | $21,194.32 | $15,300.00 | $5,894.32 | $1,413 |
| $200,000 | $28,234.30 | $15,300.00 | $12,934.30 | $268 (base reached at $199,783) |
| $300,000 | $30,912.45 | $15,300.00 | $15,612.45 | $268 |
| $400,000 | $33,590.60 | $15,300.00 | $18,290.60 | $268 |
The bend matters for expectations more than for the decision. The savings keep growing past the crossover — $2,678 per additional $100,000 of profit is still larger than the entire annual cost stack — but they stop compounding at the rate that made the first $100,000 of savings. Owners running the election math at $350,000 of projected profit sometimes expect the savings line to have tripled from the $150,000 scenario and find it has merely doubled; the wage base is why. The Additional Medicare Tax layers another 0.9% on earnings over $200,000 for high earners, and it lands on the LLC's net earnings and on the S-corp owner's salary but never on distributions — so past the threshold it quietly widens the S-corp's edge rather than cancelling out of the comparison.
One asymmetry survives the crossover and favors the S-corp permanently: the LLC's Medicare base is 92.35% of the entire profit, while the S-corp's FICA base is the salary alone. Even in the Medicare-only regime, the distribution slice escapes the 2.9% — $2,030 per $70,000 of distributions — and that arithmetic never caps.
The fine print that eats the savings
The payroll-tax comparison is the headline, not the whole ledger. What the break-even line leaves in the margins:
- Payroll deadlines never sleep. Federal deposits and state filings arrive on fixed schedules, and penalties for slips are unrelated to your savings. Some owners hand this to a bookkeeper, which is another line in the cost stack.
- Retirement account geometry changes. A solo 401(k) can be generous under either structure — but as an S-corp owner your employee deferral flows through payroll while the employer contribution is a business expense, and the W-2 compensation base is what the 25% employer share is measured against.
- Health insurance is quirky. S-corp shareholder health premiums above 2% ownership are reportable on the W-2 and have special deduction mechanics — not worse, just different enough to require attention.
- QBI interactions. The qualified business income deduction's limitations at higher incomes involve W-2 wages — an S-corp salary can help or hurt depending on the year, which is a CPA-level conversation.
- State regimes diverge. California taxes both structures with the $800 franchise tax; some states add entity-level taxes that change the math; Texas franchise margins apply to gross rather than the payroll split. This calculator is federal-only.
- Exit and investment futures. Venture investors can't take S-corp shares comfortably, and switching back later has costs. If the five-year plan involves outside capital, that plan votes first.
The retirement line is worth real dollars, so price it. The 2026 elective deferral of $24,500 works under either structure. The employer contribution is where they split: inside an S-corp it is capped at 25% of W-2 salary — $12,500 on the consultant's $50,000 — while the disregarded LLC keys off net self-employment earnings, landing near $18,600 on $100,000 of profit (20% of profit minus the deductible half of SE tax). The same business supports roughly $6,100 more retirement contribution per year as an LLC, because distributions carry no employer-contribution capacity. A lower salary saves payroll tax and shrinks the retirement ceiling in the same motion.
The mistakes that unwind the election
The election is simple; the execution failures repeat. These five get audited, penalized, or undone most often:
- The token salary. Paying $18,000 against $180,000 of profit is the profile the IRS audits for. In the best-known case, a CPA paid himself $24,000 while distributing several times that; the Tax Court accepted an expert analysis setting his reasonable salary near $91,000 and left the back payroll tax, penalties, and interest on the difference standing.
- The missed Form 2553 window. The election must be filed within two months and 15 days of the start of the year it takes effect. Late filers are not stranded — reasonable-cause relief exists on paper — but it is a petition process, not a checkbox, and the default taxation applies while it runs.
- Preferential distributions. S-corp distributions must stay substantially proportional to ownership. A 60/40 partnership cannot quietly route cash 80/20 to favor the active owner — unequal payouts are the fastest way to terminate the election itself.
- Borrowed payroll withholdings. Salary withheld from your own pay and not remitted triggers the trust-fund recovery penalty: 100% of the unremitted amount, assessed personally against every responsible person. Payroll services earn their fee on this line alone.
- Commingled accounts. Paying personal expenses from the corporate account undermines the liability shield that justified the entity in the first place — the tax savings survive, the protection does not.
Read together, the five are one lesson: the election converts a tax problem into an operations commitment. The consultants who thrive under S-corp taxation are the ones who wanted the payroll calendar, not just the savings that came with it.
A conversion, played forward on the calendar
The election is a form; the conversion is a year of calendar obligations. Here is the sequence as it actually lands for an LLC electing S-corp taxation effective January 1, 2027, with the owner paying a $90,000 salary — the version a reader in late 2026 would run.
November–December 2026: file Form 2553
Election effective for the coming year, signed by all shareholders. Filed late — more than two months and fifteen days into the tax year — and the election waits for the following year, or pleads for relief.
December 2026: stand up payroll
Confirm the EIN, register with the state as an employer, choose a payroll provider, and set the salary schedule. The reasonable-salary file — market comps, survey printouts — gets built now, before the first check, not after the first IRS notice.
January–December 2027: run the payroll calendar
Owner salary of $7,500 gross per month, FICA withheld and matched, federal Form 941 each quarter, state filings on their own schedules, and federal unemployment on the first $7,000 of wages. Every deadline that did not exist last year now exists.
Quarterly, or not: estimates shrink
Withholding from the $90,000 salary covers a large share of the household's tax bill; remaining estimates, if any, follow the safe-harbor math and typically shrink to a fraction of the pre-election amount.
January 2028: W-2 and the K-1 close the year
The owner's W-2 reports the salary and withheld taxes; Form 1120-S reports the business, with the profit flowing through Schedule K-1 to the personal return. The 1120-S and its K-1 are due March 15 — a month earlier than the old Schedule C deadline — and the W-2 lands sooner still, by January 31, which is the quiet cost nobody budgets for.
Total new paperwork for the year: one election form, four quarterly 941s, a state unemployment account, a W-2, a W-3, and the 1120-S with its K-1. That list is the real price of the payroll-tax savings — affordable at $120,000 of profit, pure overhead at $45,000, and precisely what the break-even line is measuring.
Who actually converts — and when
The profile is remarkably consistent: solo consultants, agency owners, specialized trades, and software freelancers crossing $80,000–$150,000 of stable net profit with mostly service revenue and no outside investors. The timing clusters in the fourth quarter — formation-season, when accountants pitch year-end entity changes with the deadlines attached — and again in the weeks after a first painful Schedule SE.
The people who should wait are equally identifiable. First-year businesses with unproven revenue; anyone whose profit sits near the salary floor; owners who would resent an afternoon of payroll compliance more than $2,000; and partnerships with complicated equity that an S-corp's single-class-of-stock rule cannot hold (S-corps allow one class of stock and limited eligibility — another attorney-shaped detail).
And a nod to the freelancers earlier in the journey: before entity math matters, rate math does. The freelance rate calculator is the tool that moves the profit line in the first place; the election only decides who taxes it how. The self-employment tax calculator shows precisely what the default structure costs at your number, which is usually the number that motivates the whole question.
Private by architecture
Your profit, your salary, and your payroll quotes are the exact inputs a formation-services marketing funnel would love to capture — several competitors' calculators exist to harvest them and call you about packages within the hour. This one keeps the entire comparison on your device. The SE tax, FICA, and break-even logic are client-side JavaScript; nothing is transmitted, stored, or logged, and there is no account to create on the way to your answer.
The design also keeps iteration cheap, which matters here more than anywhere: the right way to use this tool is five scenarios — optimistic profit, pessimistic profit, two salary assumptions, and one where you stay an LLC and bank the difference — before forming anything.
Entity questions, answered honestly
How much money do you save with an S-corp versus an LLC?
It depends on profit and reasonable salary. At $100,000 of net profit with a $50,000 salary, payroll taxes drop from $14,130 to $7,650 — about $6,480 saved. Subtract $1,500–$3,000 of payroll service, extra accounting, and state unemployment costs, and the net gain is roughly $3,500–$5,000. At $200,000 of profit the gross savings reach about $15,200; below roughly $60,000, the costs usually eat the benefit.
At what profit level does an S-corp election make sense?
The usual break-even sits between $60,000 and $80,000 of net profit for a single-owner service business. Below that, the 15.3% savings on the small distribution slice rarely covers payroll administration and the extra tax return. Above it, the arithmetic tilts steadily toward the S-corp — the calculator locates your exact line given your salary assumption and cost inputs.
Is an S-corp better than an LLC for taxes?
Neither is universally better — they solve different problems. An LLC taxed as a sole proprietorship pays self-employment tax on all net profit but needs no payroll. An LLC electing S-corp taxation pays FICA only on a reasonable salary, with distributions escaping payroll tax entirely, in exchange for payroll filings and formalities. Liability protection is essentially the same either way; the choice is purely about the tax trade.
What is a 'reasonable salary' for an S-corp owner?
The IRS requires compensation that a comparable business would pay for the same work before distributions are taken — what your role would command on the open market, evidenced by salary surveys, market rates for your role, and your time commitment. Paying yourself $25,000 while distributing $150,000 from a business that needs you full-time is the classic audit pattern; a defensible salary is the price of the savings.
How does the S-corp election actually work?
An S-corp is not a separate entity you form instead of an LLC — it is a tax election, filed on Form 2553, that an LLC or a corporation can make. Your LLC keeps its state registration and liability shield; the IRS simply taxes it under Subchapter S rules: one level of tax, salary through payroll, remaining profit as distributions. That is why the real question is not 'LLC or S-corp' but 'should my LLC elect S-corp taxation.'
What costs does the calculator subtract from S-corp savings?
The editable cost fields cover the standard stack: payroll service ($600–$1,500 per year for a single employee), additional accounting and the separate 1120-S return (commonly $1,000–$2,000), state unemployment insurance on the first tranche of wages, workers compensation where required, and registered agent or franchise fees. California adds its $800 franchise tax regardless of which way you elect.
Does an S-corp affect my quarterly estimated taxes?
Yes, and in a welcome direction for cash flow: withholding from your own payroll counts as timely paid tax all year, which can replace some or all quarterly estimates. The trade is that payroll deadlines now exist — federal deposits and state filings on schedule — and missing them costs penalties the calculator does not model.
Is this calculator tax or legal advice?
No. It is an educational comparison of two tax regimes using published self-employment and FICA rates and the announced 2026 wage base of $184,500. Entity elections have consequences for liability, state taxes, retirement plans, and exit strategy that no calculator captures — run your break-even here, then confirm the decision with a CPA and, where ownership is shared, a business attorney.
Is the S-corp election permanent, or can I switch back later?
It is revocable, but sticky. A voluntary revocation needs consent from shareholders holding more than half the shares, filed with the IRS, and once an election terminates — voluntarily or by botching the S-corp rules — a new election generally cannot take effect for five years without IRS consent. Companies that outgrow the structure, usually by taking outside investors, typically convert to C-corp taxation instead of revoking. Treat the election as a multi-year commitment when you run the break-even.
Does my state accept the federal S-corp election automatically?
Most states honor it, but not all and not always automatically. New York, for instance, wants its own state-level S election on file before it taxes the company as a pass-through for state purposes, and a few others have their own paperwork or timing quirks. Separately, some states impose entity-level taxes that apply no matter how you elect — California's $800 franchise tax and Texas's margin tax are the cited examples. Add a state-tax line to the cost stack before believing the federal savings translate one-for-one.
Can my salary vary from month to month as income fluctuates?
Yes, with two guardrails. Reasonableness is judged on the full year's compensation, not on any single paycheck, so seasonal owners commonly run a modest base salary and true-up with a year-end bonus — a pattern payroll providers handle weekly. The guardrails: compensation should track the work actually performed through the year, and if distributions are being taken while salary lags badly, the reasonableness file needs to explain why. Consistency remains the cheapest defense.
What actually happens if the IRS says my salary is too low?
Reclassification. The agent treats part of your distributions as unpaid wages, computes back FICA on the difference, and adds penalties and interest — and the Tax Court decides reasonableness on the facts: your duties and time, your training and background, what comparable businesses pay for the same role, and what the company could afford. Documented market-rate evidence beats a round number you liked; the consultants who keep salary studies in the corporate file rarely argue about it twice.
Can I take distributions whenever I want?
Timing is flexible, proportionality is not. Distributions can land any month the company has the cash, tax-free to the extent of your basis — but they must track ownership percentages across all shareholders, and they should never leave the company unable to pay its known bills. What you cannot do is treat them as a substitute salary: a year of distributions with no payroll is the audit trigger the reasonable-compensation rule exists to catch.
Does the S-corp election save on state taxes too?
Sometimes the opposite. California, the clearest case, charges S-corps a 1.5% entity-level tax on net income with an $800 floor, while a single-member LLC pays the $800 franchise tax and a separate gross-receipts fee only at higher revenue. On $150,000 of net income that is roughly $2,250 versus $800 — a $1,450 annual headwind against the federal savings. Run the state's own numbers before crediting the federal break-even as the whole story.
Next calculators for entity questions
The break-even sits inside a larger money picture. The self-employment tax calculator prices the default structure you'd be leaving; the quarterly estimated tax calculator shows what the switch does to your payment calendar; and the freelance rate calculator handles the upstream decision — whether the profit line is high enough for any of this to matter yet.
Sources
Entity taxation and payroll mechanics above follow the IRS and SSA primary documents:
Sources and further reading
- IRS — S corporations (small business & self-employed)(irs.gov)
- IRS — Publication 542, Corporations(irs.gov)
- IRS — Limited Liability Companies (LLCs)(irs.gov)
- SSA — Contribution and benefit base (2026 taxable maximum)(ssa.gov)
We cite primary sources (standards bodies, government agencies, official documentation) wherever they exist so you can verify every number on this page yourself.