How to Calculate S Corp Taxes
S Corporations are a celebrated strategy by the self employed. However their downside is their complexity and hidden costs. This S Corp tax calculator reveals your biggest costs, which can derail how much you could save. To compare an LLC vs S corporation here’s the general formula we’ll follow:
We’ll walk step by step through each of these areas. By the end you will know exactly what this tax savings calculator looks for to discover your true savings. First, let’s dive into the best part: the savings.
A subchapter S is a tax classification, used by corporations, to pass income and losses through to its members in the form of employee salaries or distributions.
How S Corps Create Savings
S Corps create tremendous savings because they reduce the biggest expense many LLC owners face: Self-Employment. With Social Security at 12.4% and Medicare at 2.9%, Self-Employment is a major cost of 15.3% (right off the top, before there's any income taxes paid). This tax calculator shows these values at the top of your results.
If you’re new to personal taxes 15.3% sounds like a lot less than the top bracket of 37%. However, the reality for most self employed is that they pay a lot more into Self-Employment than income taxes. This is because Self-Employment comes “right off the top”, before a large round of deductions.
This is also why S Corporations are so powerful.
Simply put, the S Corporation exposes less of your profits to costly Self-Employment tax. By setting a reasonable salary and taking the rest of your profits as a distribution, you can legally avoid Self-Employment that an ordinary LLC would pay. How much do you ask?
In this example the business owner saved $612 on $10,000 of profit, that’s a 6% lower rate for the S Corp! Please note this example is simplified to illustrate a point and actual calculations are different.
This is where the S Corp's savings come from. In the following steps we'll be looking at areas that eat away at our valuable savings.
SECA vs S Corp FICA Payroll Taxes
Always remember for both the Sole Proprietorship and the S Corp, all profits pass through to your personal taxes. However they are treated differently once they get there.
Sole Proprietors and partnerships are covered by an employment tax called SECA, while S Corp owners pay into a similar program called FICA. However an S Corporation, because they pay your salaries like a W-2 employee, also have extra payroll taxes such as unemployment insurance.
Simply put: normally a self employed person will pay full Self-Employment and no payroll. S Corps, on the other hand, pay partial Self-Employment along with payroll taxes on W-2 salaries:
|Family Leave (FLI)*
|Workers Comp (WC)*
|State Disability (SDI)*
* Only apply in some states.
As you can see S Corps are exposed to a larger group of taxes. You may be scratching your head at this point, but just know that payroll costs are usually small. Especially when compared to the larger expense: Self-Employment.
Expensive Unemployment States
Some states like Minnesota and Hawaii have expensive payroll taxes. This tax calculator will help alert you before you choose an S Corp. However sometimes a CPA can help you avoid expensive state unemployment, so with them first.
How much payroll an S Corp will pay depends on the “reasonable salary” you set. You want a low salary and a high distribution, to get your savings. However you must set a salary inline with your net income and industry, or risk serious consequences. A CPA will help you choose your optimal balance.
Estimating a Reasonable Salary
Pro tip: you can customize your reasonable salary by opening the “More Accurate” section above. Remember a higher salary is more conservative (pay more in taxes), while lowering your salary means more savings and risk!
Calculating State Franchise Taxes
There’s a special group of taxes states imposed on S Corporations. In some cases, such as in California and Delaware, they even apply to any kind of Limited Liability Company incorporated in the state, not just S Corps. This tax calculator factors in all business, LLC, and franchise taxes across all 50 U.S. states including:
While franchise taxes are not typically a deal-breaker for S Corps, some states can completely destroy your savings from Self-Employment taxes. The states listed above with the caution (⚠️) icon are probably not a good home for your S Corp.
States without S Corp Franchise Taxes: Alaska, Arizona, Florida, Hawaii, Indiana, Kansas, Maine, Maryland, Michigan, Missouri, Montana, North Dakota, Pennsylvania, Rhode Island, South Carolina, South Dakota, Utah, Virginia, and West Virginia.
There’s 2 important “below the line” deductions that impact the S Corp. Both the Qualified Business Income (QBI) and Self Employment deduction will usually be lower for S Corporation vs LLC owners.
Comparing Self-Employment Deductions
When you pay less Self-Employment taxes you get a smaller Self-Employment deduction. While not as big of a factor as the QBI deduction, it’s still included in this tax calculator. It’s approximately 50% of the taxes you paid toward Social Security and Medicare.
Comparing QBI Deductions
Qualified Business Income (QBI), also known as Section 199A, can be a major deduction. QBI means qualified business income, which includes all income from a sole proprietorship, partnership, and some from an S Corporation. You can deduct up to 20% of qualifying income, a huge savings for entrepreneurs!
This deduction can be wonderful, but unfortunately it's equally complex and confusing. For that reason we won’t be discussing how the calculator handles it here. If you’re curious here’s an excellent guide by Policy Genius.
What you should know about QBI is that it creates another tradeoff for the S Corporation. Sometimes your W-2 salary can increase your QBI deduction (that’s good). Other times your W-2 salary lowers your qualified income, which reduces the deduction. Usually this tax calculator will lower deductions more for S Corp vs LLC owners.
To improve the accuracy of your QBI deduction fill out all fields in the “More Accurate” section above.
How Are Distributions from an S Corp Taxed?
S Corporations are able to allocate some profits to their owners as distributions. These distributions pass through to their owner’s personal tax return, via Schedule K-1. These distributions completely avoid Self-Employment tax and are considered qualified business income. By increasing your salary this tax calculator will reduce your personal distributions.
Please note S Corporation distributions are very different from C Corporation dividends, which are subject to corporate level taxation.
You now understand the major savings and trade offs this calculator reveals for your LLC.
Once you feel satisfied with the tax calculator results and the potential tax rate for S Corp, it’s time to discuss this tax classification for your business with a CPA.
Be sure to speak with a tax qualified professional already serving S Corps in your state.
Updates & Changes
This calculator supports the years listed below. Additional years will be added as new tax rules get published so check back often to get your most up to date estimate.
- Support for tax year 2019 added 11/15/2019
- Support for tax year 2020 added 3/3/2020
- Support for S Corp vs C Corp added 1/20/2021
- Support for 2021 taxes added 4/2/2021
- Removed Below Line Self Employment Deduction 5/7/2021
- Support for 2022 taxes added 9/24/2022
- Support for 2023 taxes added 1/12/2024