How the S-corp tax saving works
This is one of the most powerful (and most oversold) tax strategies for freelancers. Here's what's actually happening.
The sole prop / LLC baseline
As a sole proprietor or single-member LLC taxed as a sole proprietor (the default), your entire net business income gets hit with self-employment tax. That's 12.4% Social Security on the first $176,100 (2026 wage base) plus 2.9% Medicare on all of it, for a combined 15.3%. This is on top of federal and state income tax.
If you earn $120,000 net, you pay roughly $16,952 in SE tax before you've paid a single dollar of income tax. That hurts.
The S-corp mechanism
When your LLC elects to be taxed as an S-corporation (via Form 2553), the business becomes a pass-through entity that must pay you, the owner-employee, a "reasonable salary." That salary is subject to FICA (the same 15.3%, split between you and the corp but ultimately paid by the corp out of your money). Everything above the salary gets distributed to you as an owner distribution, which is not subject to FICA or self-employment tax at all.
So if you set your reasonable salary at $60,000 and the business earns $120,000 net, you pay FICA on $60,000 ($9,180) instead of SE tax on $120,000 ($16,952). That's a $7,772 gross savings.
The overhead problem
S-corps aren't free. You need a payroll service (Gusto, Justworks, QuickBooks Payroll, roughly $40-$80/month), you need to file a separate corporate return (Form 1120-S, $500-$1,500 from a CPA), and some states charge franchise fees (California: $800/year minimum even if you make nothing). Figure $1,500 to $2,500/year in all-in overhead.
Subtract that from the gross savings and you get the real answer. In the example above: $7,772 - $1,800 = $5,972 actual annual savings. Still worth it.
Reasonable salary is where people get in trouble
The IRS knows this game. If you set your salary at $10,000 and distribute $110,000, they will reclassify the distributions as wages and hit you with back payroll taxes, penalties, and interest. The rule is that your salary must be "reasonable compensation for the services performed" — meaning what you'd pay someone else to do your job.
Common benchmarks: 40-60% of net profit, or market rate for your role from salary.com/BLS, whichever is higher. Document your reasoning. If you get audited and can show a written analysis of comparable salaries, you're in much better shape.
When the math doesn't work
Below about $60,000 net, the overhead eats most of the savings. Between $60,000 and $80,000 it's break-even. Above $80,000 it's usually a clear win, and above $150,000 it can save $10,000+/year. But there are cases where it doesn't work even at high income — for instance, if you're in a state with no income tax savings from the distribution (most states), or if you have a lot of QBI and the S-corp structure reduces your 199A deduction.
Run the numbers with your actual situation before filing Form 2553. And once you elect, you're committed for the tax year — you can't easily reverse it mid-year.
What this calculator doesn't account for
State taxes, QBI deduction interactions, retirement contribution limits (an S-corp can actually let you contribute more to a solo 401k because of the employer match), and health insurance treatment. These can push the answer in either direction. Use this as a first-pass screen, then run the exact numbers with a CPA before pulling the trigger.
Frequently asked questions
How does an S-corp save on taxes?
You pay yourself a reasonable salary (FICA applies) and take the rest as a distribution (no FICA). The distribution is the tax-saving portion.
What is a "reasonable salary"?
What you'd pay someone else to do your job. Typically 40-60% of net profit, or market rate for your role.
At what income does it make sense?
Usually $60k-$80k net. Below that, overhead wipes out savings.
What are the downsides?
Payroll service, separate tax return, state fees, and stricter formalities.
Can an LLC be taxed as an S-corp?
Yes. Form the LLC, then file Form 2553. This is the most common setup.