How an S-corp saves on tax
An S-corp splits your profit into two parts: a reasonable salary, which is subject to payroll tax, and distributions, which are not subject to self-employment or payroll tax.
Because distributions skip the 15.3% self-employment tax, the more profit you can take as distributions (above a reasonable salary), the more you save — which is what the savings line shows.
The catch: the IRS requires the salary to be 'reasonable' for the work you do, so you cannot set it to zero.
Choosing a reasonable salary
A reasonable salary reflects what you would pay someone else to do your job. Setting it too low to dodge payroll tax invites IRS scrutiny and penalties.
Try a few salary figures here to see the trade-off — a lower salary saves payroll tax but must still be defensible.
Costs the calculator ignores
An S-corp adds payroll processing, extra filings and often accounting costs, which eat into the savings — so the election usually only pays off above roughly $40,000–$50,000 of profit.
This excludes state tax, the QBI deduction and those admin costs. This is a federal estimate using 2025 tax-year figures and the inputs you provide. It does not include state tax, credits, or every deduction. Confirm with the IRS or a tax professional before filing.
Frequently asked questions
How does an S-corp reduce taxes?
It splits profit into salary (subject to 15.3% payroll tax) and distributions (not subject to self-employment tax). Avoiding self-employment tax on the distribution portion is the saving.
What is a reasonable salary for an S-corp?
What you would pay someone else for the same work. It must be defensible to the IRS — setting it artificially low to avoid payroll tax can trigger penalties.
When is an S-corp worth it?
Usually once profit comfortably exceeds a reasonable salary — often around $40,000–$50,000+ — so the self-employment-tax savings outweigh the extra payroll and accounting costs.
Does this include income tax and state tax?
It includes federal payroll and income tax. It excludes state tax, the QBI deduction and admin costs, which affect the real comparison.