Business structure comparison · 2026 federal rules
S-Corp Tax Savings Calculator
Compare estimated federal and selected-state owner tax as a sole proprietor with an S-Corp salary-and-distribution model. The first-year result includes both payroll-tax halves, recurring entity costs, and the one-time setup costs you enter.
Quick estimate
Compare sole proprietor and S-Corp tax
Estimated first-year net savings
$2,564after $1,500 of setup cost and $3,000 of annual S-Corp costsModeled ongoing annual savings are $4,064. At that level, the entered setup cost is recovered in about 4.4 months.
See the S-Corp payroll calculation
- Employee payroll tax
- $7,650.00
- Employer payroll tax
- $7,650.00
- Sole proprietor state tax
- $13,042.09
- S-Corp owner state tax
- $13,643.53
- Estimated S-Corp QBI deduction
- $18,470.00
- Tax savings before recurring cost
- $7,063.97
- Ongoing annual savings
- $4,063.97
- First-year savings after setup
- $2,563.97
Selected-state limitation: California can impose an $800 minimum franchise tax and offers an elective pass-through entity tax; neither is automatically calculated.
This educational comparison now includes selected-state individual income tax for both structures. Enter franchise, minimum, gross-receipts, unemployment, and other entity-level taxes in annual S-Corp costs because those rules are not automatically calculated.
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How this calculator works
An S corporation does not make business profit disappear from income tax. The main federal difference in this simplified owner-operator comparison is that reasonable salary is subject to employment tax, while remaining pass-through profit generally is not subject to self-employment tax.
Reasonable compensation comes first
The IRS says an S corporation must pay a shareholder-employee reasonable compensation for services before making non-wage distributions. Relevant factors include training, experience, duties, time devoted, compensation agreements, dividend history, and what comparable businesses pay. A percentage typed into a calculator does not establish a defensible salary.
Both sides of payroll tax are real costs
The model includes employee and employer Social Security and Medicare on salary. The employer half reduces pass-through profit. Additional Medicare Tax is applied on the employee side when combined wages cross the filing-status threshold. Federal and state unemployment taxes are not modeled.
Income tax and QBI still matter
Salary is ordinary wage income. Pass-through profit is also included in ordinary income but may contribute to a QBI deduction. The simplified QBI estimate uses the same Section 199A treatment as the 1099 calculator: the full 20% below the 2026 threshold of $201,775 ($403,550 for a joint return), then a linear reduction across the $75,000 phase-in range ($150,000 joint) that models a specified service business, rather than guessing at the high-income W-2 wage and qualified-property tests.
Administrative and setup costs can erase payroll savings
Payroll service, bookkeeping, a separate return, annual reports, franchise or minimum taxes, workers’ compensation, unemployment filings, and professional advice can be recurring. Formation filings, legal or accounting setup, and payroll onboarding may occur once. Enter them separately so the first-year result does not overstate savings while the ongoing result remains visible.
Eligibility, election timing, basis, distributions, accountable plans, health insurance, retirement contributions, state conformity, and payroll compliance can change both the result and the risk.
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Worked example
Consider $200,000 of business profit before owner compensation, a $100,000 proposed salary, $3,000 of recurring annual S-Corp costs, and $1,500 of one-time setup costs. Employer payroll tax reduces the remaining pass-through profit to about $92,350.
The first-year comparison subtracts both cost layers. The ongoing annual result drops the one-time setup charge, and when the modeled ongoing savings recover that cost within ten years the calculator shows how many months it takes; past that point it reports only that recovery would take more than ten years.
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Questions people ask
How much salary must an S-Corp owner take?
There is no universal percentage. Reasonable compensation depends on the services performed and facts including experience, duties, time, revenue source, and comparable pay.
Are S-Corp distributions tax free?
Not generally in the ordinary sense. Pass-through income is generally included in the shareholder’s income whether or not distributed. Distribution basis and gain rules are separate from payroll-tax treatment.
Does an S-Corp save self-employment tax?
Potentially, because pass-through profit above reasonable salary generally is not subject to SE tax. Salary remains subject to employment taxes, and costs or other tax effects can offset the savings.
Which S-Corp costs are one-time rather than annual?
Formation filings, professional setup, payroll onboarding, and initial document work may be one-time. Payroll service, tax preparation, annual reports, bookkeeping, and state entity charges may recur. Use quotes from the providers and agencies relevant to your business.
Does this calculator include state S-Corp taxes?
It includes the selected state's estimated individual income tax on owner income under both structures. Franchise, minimum, gross-receipts, payroll, elective pass-through entity, and other entity-level taxes are not automatically calculated; add them to annual entity costs.
Can I use S-Corp losses here?
No. This comparison requires positive profit and does not model stock or debt basis, at-risk rules, passive-activity limits, suspended losses, or distributions exceeding basis.
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Sources and model basis
This calculator is for tax year 2026 — the return filed in early 2027. Rates, brackets, deductions and limits are the ones in force for 2026, including changes enacted during 2026 that apply retroactively to the whole year. It does not estimate any other year.
Published rules and formulas are linked below. Values supplied by the visitor remain scenario inputs, not factual claims.
- IRS: S corporation compensation and medical insurance issuesReasonable compensation, reclassification, and shareholder health-insurance context
- IRS: S corporationsFederal election, filing, and eligibility overview
- IRS Publication 15 (2026)Employer Social Security and Medicare rules
- IRS: Qualified business income deductionSection 199A overview for pass-through owners