What counts as a 'reasonable salary'?

What you'd pay a stranger to do your job, comparable-role market data is the IRS's yardstick. 40–60% of profit is a common outcome for service businesses. $20k salary on $200k profit is how audits start.

At what profit level does an S-corp start paying?

Rule of thumb: ~$80–100k+ of consistent profit. Below that, payroll costs and admin eat the savings, exactly what the net-savings line here shows you.

What costs does the election add?

Payroll service (~$500–800/yr), a separate 1120-S return (~$800–1,500), possible state franchise taxes, and the discipline of running actual payroll for yourself. Budget $1,500–3,000 all-in annually.

Calculators

S-corp vs sole proprietor

The S-corp pitch is simple: pay yourself a reasonable salary, take the rest as distributions, and stop paying self-employment tax on the distribution half. Whether that beats the extra paperwork depends on three numbers, here they are.

Your numbers

Annual net profit

Business profit before paying yourself anything.

Reasonable W-2 salary

What the IRS would accept as market pay for your role. Lowballing this is the classic audit trigger.

Extra annual S-corp costs

Payroll service, separate tax return, state fees, extra accounting. $1,500–3,000 is typical.

What the ledger says

S-corp saves you$8,484per year

SE tax as sole proprietor: $21,194
FICA on S-corp salary: $10,710
Payroll-tax saving before costs: $10,484
Salary used in comparison: $70,000

Estimate, not advice

The formula

Sole prop: profit × 92.35% × 15.3% (SS capped at the wage base). S-corp: salary × 15.3% (SS capped), distributions free of payroll tax. Net = the difference minus your extra running costs.

What this ignores

Federal income tax (lands on the full profit either way, roughly), the QBI deduction (the salary split changes it), state franchise taxes, and reduced Social Security credits from a lower salary. Below ~$80k profit the election rarely pays. Talk to a CPA before electing.

Uses 2025 IRS constants (standard deduction $15,000; Social Security wage base $176,100).

Field notes

What counts as a 'reasonable salary'?: What you'd pay a stranger to do your job, comparable-role market data is the IRS's yardstick. 40–60% of profit is a common outcome for service businesses. $20k salary on $200k profit is how audits start.
At what profit level does an S-corp start paying?: Rule of thumb: ~$80–100k+ of consistent profit. Below that, payroll costs and admin eat the savings, exactly what the net-savings line here shows you.
What costs does the election add?: Payroll service (~$500–800/yr), a separate 1120-S return (~$800–1,500), possible state franchise taxes, and the discipline of running actual payroll for yourself. Budget $1,500–3,000 all-in annually.