LLC vs S-Corp Tax Optimizer 2026
Compare sole proprietorship vs S-Corporation tax treatment. Find out exactly how much you could save.
Typically 40-60% of profit
Sole Proprietorship
S-Corporation
LLC vs S-corp: when the election pays for itself
The short answer
An S-corporation election saves 15.3% self-employment tax on the portion of profit you take as distributions rather than salary. It typically starts paying for itself between $60,000 and $80,000 of net profit, once $2,000–$3,500 of annual payroll and filing costs are accounted for.
What actually changes
As a sole proprietor or single-member LLC, every dollar of profit is subject to self-employment tax. An S-corp election splits profit into a reasonable salary, which carries payroll tax, and distributions, which do not. The saving is 15.3% of whatever is legitimately characterised as distribution.
Forming an LLC on its own changes nothing here. A single-member LLC is a disregarded entity for tax purposes, taxed exactly like a sole proprietorship. The LLC changes your liability position; the S-corp election changes your tax.
The costs that decide the break-even
| Cost | Typical annual range |
|---|---|
| Payroll service | $500 – $1,200 |
| Form 1120S preparation | $800 – $2,000 |
| Bookkeeping to a higher standard | $600 – $1,500 |
| State franchise or filing fees | $0 – $800 |
| Total | $1,900 – $5,500 |
The widely repeated $40,000 break-even assumes about $1,000 of annual cost, which has not been realistic for some time. At $2,800 of cost, the election is worth roughly $260 a year at $50,000 of profit and roughly $2,100 at $80,000 — which is where it starts being worth the complication.
Reasonable salary is the risk
The IRS requires an owner working in the business to take reasonable compensation before distributions. There is no statutory percentage; the standard is what you would pay someone else to do your job. Splits near 60/40 salary to distribution are common and defensible for service businesses. Aggressive splits are the main audit exposure of the structure, and the consequence of reclassification is back payroll tax with penalties and interest.
When to leave it alone
- Profit below roughly $60,000 and not clearly rising.
- Volatile income — payroll obligations are fixed and do not care about a bad quarter.
- A state with a meaningful franchise tax, which raises the break-even. California's $800 minimum is the common example.
- An interaction with the QBI deduction that you have not modelled. Converting profit into W-2 salary can reduce qualified business income, and the two effects can partly cancel.
Frequently asked questions
Frequently Asked Questions
At what profit does an S-corp make sense?
Does forming an LLC reduce my taxes?
What is a reasonable S-corp salary?
Sources
- IRS Revenue Procedure 2025-32 — 2026 inflation adjustments — tax brackets, standard deduction, QBI thresholds.
- IRS Schedule SE instructions — Self-employment tax: the 92.35% adjustment, the Social Security wage base, the Medicare surtax.
- IRS Form 1040-ES — Estimated tax deadlines and the safe-harbour rules used for the quarterly schedule.
- IRS Publication 334 — Tax guide for small business — deductible expenses and net profit.
- IRS Social Security wage base — The $184,500 Social Security cap applied for 2026.
How these numbers are produced
Calculations follow the order of operations on the IRS forms themselves: net profit, the 92.35% adjustment, self-employment tax, the 50% deduction against AGI, the standard deduction, the §199A QBI deduction with its phase-out, then the federal brackets. State tax is computed separately on state AGI less that state's own standard deduction, because no state allows the federal QBI deduction and almost none allow the federal standard deduction.
What it does not cover. The calculators model a single filer or a married couple filing jointly with self-employment income as the main source. They do not model local income taxes, W-2 wages held alongside freelance work, itemized deductions, the alternative minimum tax, or credits. Where a local income tax exists, it is described on that state's page.
Not advice. SelfTaxCalc produces estimates, not tax advice. No one here is a CPA, an enrolled agent or a tax attorney, and nothing on this site creates a professional relationship. Estimates are a starting point for planning and for a conversation with a professional — they are not a substitute for one.