S-Corp vs Sole Proprietor Calculator
Only the salary portion pays payroll tax, if it's genuinely reasonable
S-Corp vs Sole Proprietor Calculator
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Sole proprietor: SE tax
0
15.3% on nearly all net income
S-corp: payroll tax on salary only
0
distribution above salary avoids employment tax
Net savings after compliance cost
0
Only the salary is subject to payroll tax
An S-corp owner pays Social Security and Medicare tax only on their W-2 salary; the remaining profit distributed as a K-1 distribution avoids employment tax entirely — a sole proprietor pays self-employment tax on nearly all of it.
“Reasonable salary” is not optional
The IRS requires S-corp owner-employees to pay themselves a reasonable salary for the work performed, comparable to what the role would pay elsewhere — setting salary artificially low purely to dodge payroll tax is a well-known audit trigger.
The savings need to beat the extra overhead
Running an S-corp means payroll processing, a separate business tax return, and usually a bookkeeper or accountant — several thousand dollars a year in added cost that only makes sense once the payroll-tax savings clearly exceed it.
Sole proprietor SE tax modeled at 15.3% on 92.35% of net income (ignoring the Social Security wage base cap above which only the 2.9% Medicare portion applies). S-corp payroll tax modeled at 15.3% (both employee and employer shares, which the business effectively pays either way) on the salary portion only — the distribution above salary is assumed to bear zero SE/payroll tax, the core S-corp tax benefit. “Reasonable salary” requirements mean you can't set salary to zero or near-zero to maximize this benefit; consult a CPA on what's defensible for your role and industry. Not tax advice.