Find your IRS-defensible owner salary and see exactly how much you can save in self-employment taxes — instantly.
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When you run a business as an LLC or sole proprietor, the IRS treats your entire profit as earned income. That means you pay 15.3% self-employment tax (Social Security + Medicare) on every dollar — before income tax even applies.
An S-Corp election changes that. Instead of paying 15.3% on everything, you split your income into two buckets: a salary (which is subject to payroll taxes) and distributions (which are not). The result? You only pay that 15.3% on a portion of your income — and the rest passes through tax-free of self-employment tax.
The IRS requires that S-Corp owners who work in their business pay themselves a salary comparable to what an unrelated employee would earn doing the same job. You can't pay yourself $1 and take everything as a distribution — that's an audit red flag.
Reasonable compensation is determined by your industry, your role, your hours worked, and local market rates. The IRS uses Bureau of Labor Statistics (BLS) wage data as a benchmark — which is exactly what this calculator uses.
Most tax professionals recommend the S-Corp election when your net business profit consistently exceeds $75,000–$80,000 per year. Below that, the added compliance costs (running payroll, filing a separate corporate tax return) tend to eat up the savings. Above $80K, the math almost always works strongly in your favor.
If you already have an LLC, you file IRS Form 2553 to elect S-Corp tax treatment. This does not change your legal structure — your business stays an LLC with all the same liability protections. For the election to apply to the current tax year, the form must generally be filed by March 15. A late election is sometimes possible, but requires IRS approval.
Running an S-Corp requires a bit more paperwork than a plain LLC. You'll need to run a formal payroll (typically $500–$1,200/year through services like Gusto or ADP Run), and your accountant will file a separate corporate tax return (Form 1120-S), typically costing $500–$1,500 more than a standard Schedule C. This calculator uses a conservative $1,800/year as an estimate for these combined costs.
Salary recommendations are based on median market-rate wages by industry from Bureau of Labor Statistics data, adjusted for the hours you work per week. A consultant working 20 hours per week warrants a different "reasonable salary" than one working 55 hours per week — the calculator accounts for this automatically.