S-Corp Tax Savings Calculator 2026

Q: How does an S-Corp election save self-employment tax?

An LLC taxed as a partnership or sole proprietorship pays 15.3% self-employment tax on all net business earnings (up to the Social Security wage base on the Social Security portion). When an LLC elects S-Corp tax status under IRC §1362, only the owner's W-2 wages are subject to FICA. Distributions to S-Corp shareholders are excluded from self-employment tax under IRC §1402(a)(13). The savings equals the SE tax on the profit above the reasonable salary, capped by the Social Security wage base.

Q: What is a reasonable salary for an S-Corp owner?

The IRS does not provide a formula. Courts apply a nine-factor test from Rev. Rul. 74-44 and subsequent case law including Watson v. Commissioner. Factors include training and experience, duties performed, time and effort devoted, comparable compensation for similar services, dividend history, compensation agreements, and the use of a formula to determine pay. A defensible reasonable salary is supported by documented comparable wage data, not chosen by percentage of net profit.

Q: What is the 2026 Social Security wage base?

The Social Security wage base for 2026 is $184,500. The 12.4% Social Security portion of self-employment tax applies only to net SE earnings up to this amount. Above the wage base, only the 2.9% Medicare portion applies, plus an additional 0.9% Medicare tax on earnings above $200,000 single or $250,000 married filing jointly. The wage base is indexed annually by the Social Security Administration.

Q: What are the additional costs of running an S-Corp?

S-Corps must file Form 1120S annually, issue a K-1 to each shareholder, run payroll for owner-employees (Form 941 quarterly, Form W-2 annually, Form W-3 to SSA, and Form 940 for FUTA), and may owe state franchise or excise tax. Most single-owner S-Corps use a payroll service ($500-$1,500 annually) or pay a CPA or bookkeeper to handle payroll filings. Most states recognize federal S-Corp election, but some (like Tennessee) tax the S-Corp entity directly and eliminate the federal savings benefit.

Q: When does S-Corp election not save money?

S-Corp election typically does not save money when: (1) net profit is below roughly $40,000-$60,000, because the reasonable salary would consume most or all of the profit; (2) the owner has other W-2 employment that already exhausts the Social Security wage base; (3) the LLC is in a state like Tennessee that taxes S-Corps directly; (4) the additional payroll and filing costs exceed the federal SE tax savings; or (5) the business is passive rental real estate, which is already exempt from SE tax under IRC §1402(a)(1).

Quick Facts — Tax Year 2025
Item	Value	Status
Self-employment tax rate (combined)	15.3%	Confirmed
SE Social Security portion	12.4%	Confirmed
SE Medicare portion	2.9%	Confirmed
Net earnings adjustment factor (Schedule SE)	92.35%	Confirmed
2026 Social Security wage base	$184,500	Confirmed
Additional Medicare Tax rate	0.9%	Confirmed
Additional Medicare Tax threshold: Single / HOH / MFS	$200,000	Confirmed
Additional Medicare Tax threshold: MFJ	$250,000	Confirmed
S-Corp distribution SE exclusion	IRC §1402(a)(13)	Confirmed
Half SE tax deduction	IRC §164(f) (income tax only)	Confirmed
S-Corp election form	Form 2553	Confirmed
Reasonable salary standard	Rev. Rul. 74-44 nine-factor test	Confirmed
S-Corp annual return	Form 1120S + Schedule K-1	Confirmed
Passive rental income	Already SE tax exempt under IRC §1402(a)(1)	Confirmed

How does an S-Corp election save self-employment tax?

An LLC taxed as a sole proprietor or partnership pays 15.3% self-employment tax on 92.35% of net earnings, capped at the Social Security wage base on the 12.4% Social Security portion. When the LLC elects S-Corp status under IRC §1362, only the owner's W-2 wages are subject to FICA. Distributions are excluded from self-employment tax under IRC §1402(a)(13). The savings equals the SE tax on the profit above the reasonable salary, capped by the Social Security wage base.

What is a reasonable salary for an S-Corp owner?

The IRS does not publish a formula. Courts apply the nine-factor test from Rev. Rul. 74-44 and cases including Watson v. Commissioner and Barron v. Commissioner. Factors include training and experience, duties, time commitment, comparable compensation, dividend history, and use of a compensation formula. A defensible reasonable salary is supported by documented comparable wage data from the Bureau of Labor Statistics OEWS report for the owner's SOC code, not chosen by percentage of net profit.

What is the 2026 Social Security wage base?

The Social Security Administration set the 2026 Social Security wage base at $184,500. The 12.4% Social Security portion of self-employment tax or FICA applies only to net SE earnings or W-2 wages up to this amount. Above the wage base, only the 2.9% Medicare portion applies, plus an additional 0.9% Medicare tax on earnings above $200,000 single or $250,000 MFJ.

What is IRC §1402(a)(13)?

Internal Revenue Code section 1402(a)(13) excludes distributions from an S corporation from the definition of self-employment earnings. This is the statutory basis for the S-Corp SE tax savings strategy. An S-Corp shareholder's W-2 wages are subject to FICA tax, but pass-through distributions reported on Schedule K-1 and Schedule E are not subject to self-employment tax. The shareholder still pays federal income tax on the distributions at their marginal rate.

How do I elect S-Corp status for my LLC?

File Form 2553 with the IRS. The standard deadline is within 2 months and 15 days after the start of the tax year you want the election to take effect. Late elections can qualify for relief under Rev. Proc. 2013-30 if filed within 3 years and 75 days of the intended effective date with reasonable cause and clean compliance. The election does not change your LLC under state law — only its federal tax classification.

What are the additional costs of running an S-Corp?

S-Corps must file Form 1120S annually with a Schedule K-1 to each shareholder, run payroll for owner-employees (Form 941 quarterly, Form W-2 and W-3 annually, Form 940 for FUTA), and may owe state franchise or excise tax. Most single-owner S-Corps use a payroll service costing $500-$1,500 annually plus a tax preparer for the 1120S. Compliance costs typically total $1,500-$3,500 per year. Factor this into the savings analysis: election makes sense when the SE savings exceed compliance by a meaningful margin.

When does S-Corp election not save money?

S-Corp election typically does not save money when (1) net profit is below roughly $40,000-$60,000, because the reasonable salary consumes most of the profit; (2) the owner has other W-2 employment that already exhausts the Social Security wage base; (3) the LLC is in Tennessee or another state that taxes S-Corps at the entity level; (4) the additional payroll and filing costs exceed the federal SE tax savings; or (5) the business is passive rental real estate, which is already exempt from SE tax under IRC §1402(a)(1).

Does this calculator apply to multi-member LLCs?

Yes, but the math applies to a single owner's share of the LLC. For a multi-member LLC, each member pays self-employment tax on their allocable share of partnership ordinary income plus any guaranteed payments, which are also SE taxable. An S-Corp election converts every member-shareholder's wages into FICA-taxable W-2 pay, with the remainder of their distributive share excluded from SE tax under §1402(a)(13). Run the calculator once per member to estimate member-level savings.

Is half of self-employment tax deductible?

Yes. Under IRC §164(f), a sole proprietor or LLC member may deduct 50% of self-employment tax paid as an adjustment to gross income on Schedule 1 of Form 1040. This reduces income tax but not self-employment tax itself. The deduction partially offsets the headline SE tax number at the income tax level — typically reducing net federal savings to about 70-85% of the headline SE-vs-FICA difference. This calculator shows gross SE tax vs gross FICA for clarity.

What is the additional 0.9% Medicare tax?

IRC §3101(b)(2) imposes an additional 0.9% Medicare tax on wages and self-employment income above $200,000 for single filers and $250,000 for married filing jointly. This tax applies to both LLC self-employment income and S-Corp W-2 wages. It is the employee's obligation only (no employer or S-Corp matching portion). On the same earnings amount, the additional Medicare tax is identical on both sides, so S-Corp election does not save on this component.

Quick Facts: S-Corp Savings Calculation (Tax Year 2025)

How This Is Calculated

Step 1: LLC Default — Self-Employment Tax Confirmed

Step 2: S-Corp Election — FICA on Salary Only Confirmed

Step 3: SE Tax Savings Confirmed

Assumptions

When S-Corp Election Typically Saves Money

Real-World Example

Practitioner Insight (LMN Tax Inc.)

When This Estimate May Not Apply

Frequently Asked Questions

What To Do Next

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