The salary you pick changes the answer
A lower salary shelters more of the profit as a distribution and shows bigger savings — but it also has to survive IRS scrutiny as genuinely reasonable pay for the work. Try a few salary levels here to see how sensitive the savings are before committing to one. Already comparing a solo retirement plan? See the Solo 401(k) Calculator.
Frequently asked questions
Why does an S-Corp save on taxes at all?
A sole proprietor or single-member LLC pays self-employment tax (15.3%, less an adjustment) on the entire net profit. An S-Corp only owes payroll tax on the "reasonable salary" you pay yourself — the rest is a distribution, which isn't subject to Social Security or Medicare tax at all.
What counts as a "reasonable salary"?
The IRS requires it to reflect what you'd actually pay someone else to do your job — setting it artificially low to dodge payroll tax is the most common S-Corp audit trigger. Research comparable salaries for your role and industry before picking a number.
Is the S-Corp election ever a bad idea?
Below roughly $40,000-$60,000 of net profit, the extra payroll administration, tax filing, and formality costs usually outweigh the savings — the election tends to pay off once profit comfortably clears that range.
Last updated: June 2026