Corporate Tax Flow Through Simulator: LLC vs. S-Corp Tax Liability
Enter your business income and owner salary to instantly model and compare total tax liability under an LLC versus an S-Corporation. See your real-time FICA savings, income tax, and annual bottom-line difference.
Business Income & Owner Profile
All calculations update in real time as you type. No calculate button needed.
$
Profit before any owner compensation or payroll taxes.
%
Your estimated blended federal and state income tax rate.
S-Corp Salary Requirements
The IRS requires S-Corp owner-employees to pay themselves a reasonable W-2 salary.
$
Estimated S-Corp Tax Savings
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Enter your business income and salary above to see results
LLC / Sole Proprietorship
Total Tax Liability
$--
Self-Employment (SE) Tax$--
Income Tax$--
S-Corporation
Total Tax Liability
$--
Payroll (FICA) Tax$--
Income Tax$--
Estimates only, not tax or legal advice. This simulator models federal self-employment tax and a flat effective income tax rate. It does not account for state taxes, deductions, credits, the Social Security wage base phase-out, additional Medicare tax, S-Corp administrative costs, or state-specific franchise taxes. Consult a CPA or tax professional before making entity structure decisions.
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Key Terms Explained
LLC (Limited Liability Company)
A flexible legal business structure that protects owners from personal liability. By default, a single-member LLC is taxed as a disregarded entity (sole proprietor), meaning all profit flows to the owner's personal return and is subject to self-employment tax.
S-Corporation
A tax election (not a legal entity type) that allows a corporation or LLC to pass income through to shareholders' personal returns. The defining advantage is that distributions above the owner's W-2 salary are not subject to payroll taxes.
Pass-Through Taxation
A tax treatment where business income is not taxed at the entity level. Instead, profits "pass through" to the owner's personal return and are taxed once, at the owner's individual rate. Both LLCs and S-Corps are pass-through entities.
Self-Employment (SE) Tax
The 15.3% tax (12.4% Social Security + 2.9% Medicare) paid by self-employed individuals and LLC owners on their net business income. It covers both the employer and employee halves of payroll taxes. LLC owners pay this on all net profit.
FICA Taxes
Federal Insurance Contributions Act taxes, covering Social Security (12.4%) and Medicare (2.9%). In a traditional employee relationship, the employer and employee each pay half (7.65% each). An S-Corp owner pays the full 15.3% on their W-2 salary but owes no FICA on distributions.
Reasonable Compensation
The IRS requirement that S-Corp owner-employees pay themselves a salary comparable to what a third party would be paid for the same work. Setting an artificially low salary to maximize FICA-free distributions is a common audit trigger and can result in penalties.
Shareholder Distributions
Profits paid from an S-Corp to its owner-shareholders beyond their W-2 salary. Distributions pass through to the owner's personal return and are subject to income tax, but unlike the W-2 salary, they are exempt from FICA payroll taxes. This is the source of S-Corp tax savings.
SE Tax Deduction
The IRS allows LLC owners to deduct half of their self-employment tax from their gross income before calculating income tax, mimicking the employer's ability to deduct its share of payroll taxes as a business expense. This simulator applies this deduction in the LLC calculation.
The Complete Guide to LLC vs. S-Corp Tax Planning
Choosing how your business is taxed is one of the highest-leverage financial decisions a small business owner can make. For many profitable businesses, electing S-Corp tax treatment can save thousands of dollars per year in FICA taxes. But the math only works above a certain income level, and the administrative costs are real. This guide explains exactly how the tax mechanics work so you can make an informed decision.
How to use this simulator
Enter your total annual business net profit (the income after all business expenses, but before any owner compensation or payroll taxes). Then enter your effective personal income tax rate, which is your blended federal and state rate, not just your marginal bracket. If you are unsure, 22% to 28% covers most small business owners. Finally, enter a proposed W-2 salary for the S-Corp scenario. The tool will instantly calculate and compare your total tax liability under both entity types, highlighting your savings or additional cost.
How an LLC is taxed
When you operate as an LLC (or sole proprietor), 100% of your net profit is treated as self-employment income. You first calculate self-employment tax on 92.35% of your net income (the IRS allows a small adjustment to account for the fact that employees do not pay the employer portion). The SE tax rate is 15.3%, covering Social Security and Medicare. You can then deduct half of this SE tax from your gross income before calculating ordinary income tax, which mirrors the treatment of an employer paying their share of payroll taxes. The result: LLC owners pay both a large SE tax bill and income tax on nearly all of their profit.
How an S-Corp is taxed
With an S-Corp election, you split your compensation into two streams. First, you pay yourself a reasonable W-2 salary. The full 15.3% FICA tax applies to that salary. Second, any remaining profit is distributed to you as a shareholder distribution. Those distributions pass through to your personal return and you pay income tax on them, but you owe no FICA taxes. The bigger the gap between your total profit and your required salary, the larger the FICA savings.
The core math behind the savings
The S-Corp savings come from the difference in SE/FICA tax between the two structures. Under an LLC, you pay 15.3% (technically on 92.35% of income) on everything. Under an S-Corp, you only pay 15.3% FICA on your salary. Distributions above the salary escape FICA entirely. For a business earning $150,000 with a $70,000 salary, the S-Corp owner pays FICA only on $70,000, while an LLC owner pays on the full $150,000. The income tax burden is similar either way, since all the profit flows through to the personal return regardless of entity type.
Tax Component
LLC / Sole Proprietor
S-Corporation
SE / FICA Tax Base
Net income x 92.35%
W-2 salary only
SE / FICA Rate
15.3%
15.3% on salary
Distributions subject to FICA?
N/A (all income is SE income)
No
Income Tax Base
Net income minus half of SE tax
Salary plus distributions
Requires payroll?
No
Yes (W-2 required)
Separate business tax return?
Schedule C on Form 1040
Form 1120-S (separate filing)
The reasonable compensation rule and audit risk
The IRS is well aware of the S-Corp strategy and actively scrutinizes S-Corp owner compensation. If you set your salary unreasonably low relative to the work you perform and the profit you generate, the IRS can reclassify distributions as wages and assess back FICA taxes, interest, and penalties. While there is no single IRS formula, many practitioners use a salary of 40% to 60% of net profit as a defensible starting point. This simulator flags salaries below 30% or above 90% of net income as potential scrutiny zones.
Frequently Asked Questions
Most tax professionals suggest the S-Corp election starts making financial sense when your net business profit is roughly $40,000 to $50,000 per year or higher. Below that threshold, the administrative overhead costs of running an S-Corp (payroll processing, quarterly payroll tax filings, a separate corporate tax return on Form 1120-S, and often higher accounting fees) can easily exceed the FICA tax savings. The sweet spot is typically $80,000 to $150,000 of net profit, where the savings are substantial and unambiguous. Use this simulator to find your personal crossover point.
The IRS requires S-Corp owner-employees to pay themselves a W-2 salary that is reasonable for the services they perform. Reasonable compensation is generally defined as what you would pay a third-party employee to do the same work. The IRS looks at factors including the nature of the work, hours worked, the company revenue, and comparable wages in the industry. As a practical rule of thumb, many CPAs use a range of 40% to 60% of net business profit, and salaries below 30% of net profit or above 90% will attract heightened scrutiny. Setting your salary too low to maximize distributions is one of the most audited issues in S-Corp taxation.
Yes. S-Corp distributions are pass-through income and are included on your personal tax return. You will pay ordinary income tax on them at your personal tax rate, the same as any other income. The key advantage of distributions is that they are NOT subject to FICA payroll taxes (the 15.3% Social Security and Medicare taxes), unlike your W-2 salary. This is the core mechanic that creates the tax savings: you shift some of your compensation from salary (FICA-taxable) to distributions (FICA-exempt), while still paying income tax on the full amount either way.
Yes, and they are significant enough to factor into your decision. Running an S-Corp typically requires a separate corporate tax return (Form 1120-S), which costs $500 to $2,000 or more with a CPA. You will also need to run formal payroll for your salary, which adds monthly or quarterly payroll service fees ($50 to $200 per month). There may also be state filing fees, annual report requirements, and potentially franchise taxes depending on your state. These costs are real and should be netted against the FICA savings this simulator calculates before concluding the S-Corp is beneficial.
Yes. An LLC can elect S-Corp tax treatment by filing IRS Form 2553. The LLC remains an LLC for legal and liability purposes, but the IRS treats it as an S-Corp for tax purposes. This is one of the most common structures used by small business owners: a single-member LLC (legally simple and cheap to maintain) that elects S-Corp taxation to reduce self-employment taxes. You get the legal simplicity of an LLC combined with the payroll tax savings of an S-Corp.