Small business tax calculator

The entity and the tax treatment are two separate choices

An LLC is a legal structure created under state law. It limits your personal liability and it says nothing at all about how you are taxed. A single-member LLC is disregarded for federal tax by default — you file the same Schedule C you would have filed without it, and your tax bill is identical.

This is worth being blunt about because a great deal of marketing implies otherwise. Forming an LLC does not by itself reduce tax by a dollar. What it does is separate your business liabilities from your personal assets, which is a real and often worthwhile benefit — a different one.

The tax choice is separate: how the entity elects to be treated. A single-member LLC can be disregarded, or elect to be taxed as an S corporation, or as a C corporation. Those elections change the tax outcome; the entity by itself does not.

The S-corp election is the one that carries a genuine payroll tax saving, and it is available to LLCs and to corporations alike. The C-corp election is a different animal entirely, involving corporate tax on profits and a second layer of tax on distributions, and it rarely suits a small owner-operated business.

So the sequence is: decide on liability protection first, on tax treatment second, and do not let a provider bundle the two into a single pitch. They are answered by different considerations and often by different advisers.

What an S-corp actually saves, and what it costs

As a sole proprietor, the whole of your profit is subject to self-employment tax. On $150,000 that is $21,194 — 15.30% of 92.35% of the profit, before any income tax.

As an S corporation, you pay yourself a salary subject to FICA and take the rest as a distribution that is not. With a $75,000 salary on $150,000 of profit, $75,000 comes out as distribution, and the payroll tax avoided on it is roughly $10,597.

Against that sit real costs. A payroll service to run the salary properly. A separate corporate return, which a preparer charges for. In several states a franchise tax or annual report fee that applies whether or not you made money. Together those typically run $1,000 to $2,500 a year.

There is also an effect on the QBI deduction that cuts the other way. Wages paid reduce the business's qualified income, so a large salary can shrink a 20% deduction you would otherwise have had — which means the optimal salary is not simply the lowest defensible one, and the two effects have to be modelled together.

The rough shape: below roughly $80,000 of profit the costs usually eat the saving. Between there and $150,000 it depends on what salary is defensible. Above that the saving is generally clear, provided the salary survives scrutiny.

"Reasonable salary" is where this goes wrong

The whole of the S-corp saving depends on paying yourself a salary that is reasonable for the work you actually perform. That is a facts-and-circumstances test, not a percentage, and it is the single most litigated issue in this corner of the tax code.

What the test looks at: your duties and the time spent on them, your training and experience, what comparable businesses pay for comparable work, what the business could earn without you, and how much of the profit is attributable to your labour rather than to capital or to other employees.

The failure mode is consistent and expensive. An owner takes a token salary and a very large distribution, the arrangement is examined, the distributions are recharacterised as wages, and the result is the payroll tax that was avoided plus interest plus penalties — comfortably more than the election ever saved.

The defensible position is documented rather than argued. Written comparables from salary surveys for the role, a record of hours and duties, and a salary that a stranger doing your job would plausibly accept. If you would not hire someone to do your work for what you pay yourself, the number is too low.

And it must actually be run as payroll: a real salary paid on a schedule, with withholding, payroll tax deposits and a W-2 at year end. An owner who elects S-corp status and then never runs payroll has the costs of the election with none of its protection.

The 20% deduction, and how the entity choice interacts with it

Section 199A gives up to a 20% deduction on qualified business income, and it applies to sole proprietorships, partnerships and S corporations alike. It does not apply to C corporations, whose profits are taxed at the corporate rate instead.

Below $201,750 single or $403,500 joint of taxable income, the deduction is simply 20% of qualified business income limited by 20% of taxable income, with no further tests. Most small businesses live entirely in this range and the complications below never arise.

Above the threshold two limits appear. A specified service trade or business — law, medicine, accounting, consulting, financial services, performing arts, athletics — phases out of the deduction entirely by $276,750 single. Everything else becomes subject to limits based on W-2 wages paid and on the basis of qualified property held.

That wage limit is what makes the S-corp interaction genuinely complicated for a higher-earning business. Paying wages reduces qualified income, which reduces the deduction — but above the threshold, paying wages is also what enables the deduction to survive the wage limit at all. The two effects point in opposite directions and the optimum is in the middle.

For a business near the threshold, the most valuable move is often neither: a retirement contribution that pulls taxable income back below it. That restores a full deduction as well as sheltering the contribution, and the two together are frequently worth more than the S-corp election was.

Five ways a small business tax estimate goes wrong

Believing an LLC reduces tax. A single-member LLC is disregarded for federal tax by default. It changes your liability exposure, not your bill. The tax saving comes from an election, which is a separate decision.

Modelling an S-corp saving without the costs. Payroll service, a separate return and state fees typically run $1,000 to $2,500 a year. Below roughly $80,000 of profit those usually exceed the saving.

Setting the salary at what saves the most tax. It has to be reasonable for the work. Recharacterisation costs the avoided payroll tax plus interest and penalties, and it is the most examined issue in this area.

Forgetting the QBI interaction. Wages paid reduce qualified business income, so a large salary can shrink the 20% deduction. Modelling the payroll saving without it overstates the benefit of the election.

Ignoring state-level entity taxes. Several states impose a franchise tax, a minimum entity tax or an annual fee that applies regardless of profit, and a few tax S corporations directly rather than following the federal treatment. A federal-only comparison can point the wrong way entirely.

What running an S-corp actually involves month to month

Electing S-corp status is the easy part; operating as one is an ongoing obligation. You become an employer of yourself, with everything that entails: a salary paid on a regular schedule, income tax and FICA withheld from it, payroll tax deposits made on time, quarterly employment tax returns, and a W-2 issued at year end.

Deposit deadlines are their own regime and the penalties for missing them are steep relative to the amounts involved. This is the main reason a payroll service is not optional in practice — the cost of one is materially less than the cost of learning the deposit schedule by making mistakes.

A separate corporate return is required regardless of profit, and it is due earlier than the personal return. Missing it carries a penalty per shareholder per month, which for a single-owner company is modest per month and unpleasant after a year of not realising it was due.

Corporate formalities matter too, though they are undemanding for a single owner: a genuinely separate bank account, no personal expenses run through the business, and distributions recorded as distributions. The looser the separation, the weaker the position if the arrangement is examined.

And it does not switch off cleanly. Revoking an S-corp election generally bars re-electing for five years without permission, so it is not a structure to try for a year and abandon. That asymmetry is a good reason to be confident about the profit level before electing rather than after.

The deductions that apply whichever structure you choose

Entity choice changes how profit is taxed, not what counts as profit. The deductions below reduce the bill under any structure, and they are usually worth more attention than the election itself.

Equipment can often be expensed in full in the year of purchase rather than depreciated, under § 179 or bonus depreciation, subject to limits tied to profitability. For a business buying vehicles, machinery or substantial technology, the timing of a purchase across a year end is a real decision.

A home office deduction requires exclusive and regular business use of a defined space. The simplified method uses a rate per square foot with a cap and needs no expense records; the actual method apportions real household costs and is usually larger for anyone with a genuinely substantial space.

Vehicle costs work the same way: a standard mileage rate that requires only a log, or actual costs apportioned by business use. You generally must choose in the first year of using a vehicle for business, and the choice constrains later years — which makes it worth deciding deliberately rather than by default.

Health insurance premiums, retirement contributions and the qualified business income deduction all sit on the personal return rather than in the business accounts, which is why they are the ones most often missed by owners doing their own bookkeeping carefully and their own tax return quickly.

The retirement accounts that make owning a business worthwhile

A business owner has access to contribution limits an employee cannot approach, and this is frequently worth more than any entity election. A solo 401(k) allows contributions in both capacities — as employee and as employer — so the combined total far exceeds an ordinary employee's cap.

A SEP-IRA is simpler: a percentage of compensation, no annual filing until the balance is substantial, and it can be established and funded after the year has ended. That last point makes it the tool for an owner who discovers in March that the previous year was better than expected.

A defined benefit or cash balance plan goes considerably further for an older owner with high, stable profit, allowing contributions well beyond either of the above. It carries actuarial costs and an annual funding obligation, so it suits a settled business rather than a volatile one.

The interaction with the S-corp election is worth modelling, because it cuts against the usual advice. Employer retirement contributions are based on W-2 wages, so the low salary that minimises payroll tax also caps what can be contributed — and for an owner prioritising retirement saving, a higher salary can be worth more than the payroll tax it costs.

Contributions also reduce taxable income, which can pull a business owner below the QBI threshold and restore a deduction that would otherwise phase out. For an owner near that line, the combined effect of a contribution regularly exceeds its own marginal rate by a wide margin.

The state layer that can reverse the answer

A federal-only comparison of entity structures is incomplete, and in several states it points the wrong way. States impose their own charges on entities that have nothing to do with profit.

Franchise taxes and minimum entity taxes apply in a number of states whether or not the business made money, sometimes at several hundred dollars a year and sometimes more. For a business at the margin of an S-corp election, that fixed cost is often what decides it.

Some states do not fully follow the federal treatment of S corporations, taxing them at entity level as well as through the owner's return. Where that happens, the payroll tax saving is offset by a state charge that the federal comparison never showed.

Annual report fees, registered agent costs and business licence requirements add further fixed costs that scale with the number of states you operate in rather than with revenue. A business registered in three states pays three sets.

And where you operate matters as much as where you registered. Doing business in a state generally creates a filing obligation there regardless of where the entity was formed, which is why forming in a state with no income tax while working somewhere else rarely produces the saving it appears to promise.

The order to make these decisions in

Start by operating. A sole proprietorship requires no formation, no filing and no fee — you are one the moment you start working for yourself. Deferring structural decisions until there is profit to structure is not procrastination, it is sequencing.

Separate the money first, before anything else. A dedicated bank account and card, used for nothing personal, from the first transaction. It costs nothing, it is what makes every later decision computable, and it is the single most common thing owners wish they had done sooner.

Add liability protection when there is something to protect or when a client requires it. An LLC does that and does not change your tax. Treat it as an insurance decision rather than a tax one, and price it against what it actually covers.

Consider the S-corp election once profit is consistently above what a reasonable salary for your work would be, with enough margin to cover the payroll and filing costs. Model it with the QBI interaction included, because the wage effect can reverse a saving computed on payroll tax alone.

And revisit annually rather than once. Profit changes, a defensible salary changes, state fees change, and the thresholds move. A structure that was right at $60,000 of profit is not automatically right at $200,000, and the reverse is equally true.

Questions

Does an LLC save me tax?

By itself, no. A single-member LLC is disregarded for federal tax by default, so you file the same Schedule C and pay the same amount. It limits personal liability, which is a real benefit and a different one. The tax saving comes from electing S-corp treatment, which is a separate choice available to LLCs and corporations alike.

At what profit is an S-corp worth it?

Broadly above $80,000 to $100,000, depending on what salary is defensible for your work. Below that, the payroll service, separate return and state fees — typically $1,000 to $2,500 a year — usually exceed the payroll tax saved. On $150,000 of profit the sole-proprietor self-employment tax alone is $21,194, so there is real money to work with.

What is a reasonable salary for an S-corp owner?

What a stranger would be paid to do your job: based on duties, hours, experience and what comparable businesses pay. There is no safe percentage. Document it with salary survey comparables before you set it, because recharacterisation of distributions as wages costs the avoided tax plus interest and penalties.

Do S-corp distributions avoid all tax?

No — only payroll tax. Distributions are still subject to income tax as they flow through to your personal return. What they avoid is the Social Security and Medicare component, which is the entire basis of the election.

Should I be a C-corp instead?

Rarely, for a small owner-operated business. C-corp profits are taxed at the corporate level and again when distributed to you, and the qualified business income deduction is not available. It can suit a business retaining substantial profits for growth or seeking outside investment, which is a different situation from most small businesses.

Can I switch between structures later?

Yes, though not freely. An S-corp election has timing rules for when it takes effect, and revoking it generally bars re-electing for five years without permission. Changing entity type entirely can trigger tax consequences depending on what is transferred. It is a decision worth getting right rather than iterating on.