Compare federal tax under sole prop, default LLC, and LLC + S-Corp election.
Sole prop
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LLC (default)
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LLC + S-Corp
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Best option
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Your breakdown
Updates live as you type| Step | Sole prop / LLC | LLC + S-Corp |
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The only tax difference that matters here
A sole proprietorship and a single-member LLC are taxed identically by the IRS. The LLC is a state-law liability shield, not a federal tax category; left at its default, the IRS treats it as a disregarded entity and the profit flows onto your Schedule C exactly as a sole proprietor's would. So if the question is purely about federal tax, those two columns will always match in this calculator. The real fork in the road is the S-Corp election, made on Form 2553, which splits your profit into a salary and a distribution and changes how much self-employment tax you owe.
Here is the mechanism. A sole proprietor pays 15.3 percent self-employment tax on 92.35 percent of net profit, covering Social Security and Medicare. An S-Corp pays full payroll tax only on the salary it pays you; the leftover distribution escapes that 15.3 percent. That is the entire savings engine. The catch is that the IRS requires the salary to be reasonable for the work you do, and running payroll plus a separate 1120-S return adds administrative cost, modeled here as a flat $1,500 a year.
Running the numbers on $120,000 of profit
Use the defaults: $120,000 of net profit, a $60,000 reasonable salary, and a 22 percent marginal income tax rate. As a sole proprietor or default LLC, self-employment tax is $120,000 times 0.9235 times 0.153, which is $16,955, and income tax falls on profit minus half that SE tax, giving a total federal burden of about $41,490. Elect S-Corp status and payroll tax applies only to the $60,000 salary: the employer and employee FICA together run $9,180, income tax applies to the salary plus the $60,000 distribution, and adding the $1,500 admin cost lands you at roughly $36,070. The election saves about $5,420 a year at these inputs.
What reasonable salary actually means to the IRS
This is where S-Corp owners get into trouble. The IRS expects the salary to reflect what you would pay someone else to do your job, and an artificially low salary stuffed to maximize distributions invites reclassification, back payroll taxes, and penalties. There is no published formula, but examiners look at comparable wages, your hours, your role, and how much of the profit traces to your personal labor versus invested capital. A common sanity check is to keep the salary somewhere near 40 to 60 percent of profit for a service business, then document how you arrived at it.
When the S-Corp election stops paying off
The savings shrink as the gap between profit and a defensible salary narrows. Below roughly $60,000 of profit, the payroll and compliance overhead often eats the SE-tax savings, which is why that is a frequently cited break-even. The election also commits you to monthly or quarterly payroll filings, state franchise fees in some states, and a separate business return. One important caveat: this tool simplifies and leaves out the qualified business income deduction under Section 199A and any state income tax, both of which can shift the comparison. Treat the output as a federal SE-tax screen, then confirm with a CPA who can model your state and QBI position before you file Form 2553.
Can I switch back if the S-Corp election does not work out?
You can revoke an S-Corp election, but the IRS generally bars re-electing for five tax years afterward without special permission. Because of that lockout, treat the election as a multi-year commitment rather than something to toggle annually, and make the call when your profit is durably above the break-even.
Does the S-Corp election change my liability protection?
No. Liability protection comes from the LLC or corporation itself, not from the tax election. An LLC that elects S-Corp treatment keeps the exact same legal shield; you are only changing how the entity is taxed, not its standing as a separate legal person.