Entity choice tax calculator
Sole prop, S-corp, or C-corp — see estimated self-employment tax, payroll tax, and double taxation side by side on your own numbers, as a starting point for the conversation with your CPA.
| Payroll / SE tax | Income tax | Corporate tax | Total tax | Take-home | |
|---|---|---|---|---|---|
| Sole prop / LLC | $21,194 | $39,033 | — | $60,227 | $89,773 |
| S-corp electionLowest tax | $10,710 | $40,501 | — | $51,211 | $98,789 |
| C-corp (distributed) | $10,710 | $28,445 | $15,675 | $54,831 | $95,169 |
If C-corp profit is kept in the company instead of distributed as a dividend this year, take-home (deferred) is $104,015 — the second tax layer only applies once profit actually comes out. Reference comparison only, not a filing recommendation — the Section 199A pass-through deduction, state entity-level taxes, and the IRS's own reasonable-salary standard aren't modeled here. Talk to a CPA before acting on this.
The three structures
No election filed. All profit is self-employment income — the owner pays self-employment tax (15.3%, on 92.35% of net profit) on the entire amount, plus ordinary income tax.
The owner becomes a W-2 employee of their own company, paid a reasonable salary (full payroll tax applies), with remaining profit paid out as a distribution that skips payroll tax and self-employment tax entirely.
The company pays a flat 21% federal corporate tax on profit after salary. If that after-tax profit is distributed to the owner as a dividend, it's taxed again at the individual level — the "double taxation" C-corps are known for.
How the S-corp savings work
A worked example
A consultant nets $150,000 and sets a $70,000 reasonable salary. As a sole proprietor, self-employment tax alone runs roughly $21,200 on the full $150,000. As an S-corp, payroll tax applies only to the $70,000 salary — about $10,700 total — while the remaining ~$80,000 distribution is taxed as ordinary income only, putting several thousand dollars more in the owner's pocket at a 28% income tax rate, before weighing the added cost of running payroll and a separate corporate return.
The reasonable salary question
There's no official salary calculator or fixed percentage the IRS publishes — "reasonable" means comparable to what an unrelated employer would pay someone else to do the same job, considering training, experience, time invested, and what similar roles pay in the same industry and region. Setting salary unreasonably low relative to distributions is one of the more common triggers for an S-corp audit; documenting how the salary was determined (comparable job postings, industry salary surveys) is a common way advisors protect the position.
What this calculator leaves out
Can shelter up to 20% of pass-through income, but phases out by total taxable income and business type — significant enough to change the comparison, specific enough that it needs a real return, not a general tool.
Several states impose their own franchise tax, LLC fee, or pass-through entity tax on top of federal treatment — not modeled here since rules vary entirely by state.
S-corp and C-corp status add real recurring costs (payroll processing, a separate corporate return, often higher accounting fees) that should be weighed against the tax savings shown.
This models a single owner-operator. Multiple shareholders, equity compensation, and a future sale or funding round all change the calculus, particularly for C-corps.
Frequently asked questions
By splitting owner compensation into a salary (subject to full payroll tax) and a distribution (not subject to payroll tax or self-employment tax at all). A sole proprietor pays self-employment tax on 100% of profit; an S-corp owner only pays it on the salary portion — the distribution above that salary skips it entirely, which is the entire savings mechanism.
The IRS requires an S-corp owner-employee to pay themselves a salary comparable to what the role would earn on the open market, specifically to prevent artificially minimizing salary to dodge payroll tax on nearly all of the profit. Setting salary too low is one of the more common S-corp audit triggers — there's no single bright-line percentage, but $0 or a token amount on a profitable business is a clear red flag.
C-corp profit is taxed once at the corporate level (a flat 21% federal rate), and then taxed again at the individual level if and when it's distributed to the owner as a dividend. Profit that stays in the company avoids the second layer entirely until it's actually paid out — which is why the calculator above shows a separate "if retained" figure.
A few common reasons: qualifying for Section 1202 qualified small business stock exclusion on a future exit, raising venture capital (most VCs require or strongly prefer a C-corp), offering employee stock options more cleanly, or a business plan built around reinvesting profit rather than distributing it, since retained earnings avoid the second tax layer for as long as they stay in the company.
No — the qualified business income deduction can reduce pass-through taxable income (sole prop and S-corp) by up to 20%, but it phases out based on total taxable income and, above certain thresholds, is limited or disallowed entirely for specified service businesses (law, accounting, consulting, and similar). It's meaningful enough to change the comparison and specific enough to your situation that it belongs in a conversation with a CPA, not a general calculator.
Not by default. A single-member LLC is, for federal tax purposes, disregarded — taxed identically to a sole proprietorship unless it elects S-corp or C-corp tax treatment. The LLC itself is a legal liability shield, not a separate tax status, which is a common point of confusion.
There's no universal number, since it depends on the reasonable salary a specific role would command, but many advisors informally cite somewhere in the $60,000-$80,000 net profit range as where the payroll-tax savings on the distribution portion starts to meaningfully outweigh the added cost of running payroll and filing a separate corporate return. Below that, the administrative overhead can eat most or all of the tax savings.
Running an S-corp or C-corp adds real costs a sole proprietorship doesn't have: payroll processing, a separate corporate tax return, and often higher accounting fees — commonly $1,000-$3,000+ a year combined. Those costs should be weighed against the tax savings shown above, not ignored.
Run your own numbers above, free, or model what a future exit looks like on the business valuation calculator.
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