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Sole prop vs LLC vs S-Corp tax savings
Compare federal tax owed across sole proprietor, LLC (default), and S-Corp election structures at a given net SE income.
S-Corp savings vs sole prop
Show the work
- Sole prop total tax$62,151
- S-Corp total tax$55,618
- SE tax saved by S-Corp$7,424
When to elect S-Corp — the SE tax math
Sole props (and default LLCs) pay 15.3% self-employment tax on ALL net SE income. S-Corp election lets you split SE income into:
- Reasonable salary (subject to payroll tax = 15.3%)
- Distributions (NOT subject to payroll tax)
The savings: 15.3% × distribution amount = S-Corp savings vs sole prop.
The math
Net SE income $150k, reasonable salary $90k, distribution $60k:
- Sole prop SE tax: $150k × 0.9235 × 15.3% = $21,194
- S-Corp payroll tax: $90k × 15.3% = $13,770
- Savings: ~$7,400/yr
Where the math breaks down
- Below ~$60k net SE: S-Corp setup + payroll cost ($1,500-3,000/yr) eats the savings
- Reasonable salary too low: IRS audits S-Corp owners with absurdly low salaries ($20k for a $300k consultant). Get docked + penalties.
- State rules vary: CA imposes 1.5% S-Corp franchise tax on top of regular tax — eats some savings.
When S-Corp wins
- Net SE income $80k+
- Predictable steady income (justifies setup overhead)
- Legitimate "reasonable" salary defendable per BLS data for your role
- State doesn't have a punitive S-Corp tax
When S-Corp loses
- Below $60-80k net SE — overhead exceeds savings
- Volatile income (irregular paychecks complicated)
- High retirement contributions (S-Corp 25% employer cap limits Solo 401k contributions)
- States with hostile S-Corp tax regimes (CA, IL — but still often net positive)
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