LLC vs. S-Corp: The Tax Math by Income Level (with Worked Examples)

#Why we wrote this article

Just so you know — most “S-corp tax savings calculator” articles online use a single oversimplified formula and skip the parts that actually change the answer for real owners. They ignore the Social Security wage base ceiling, they double-count the income-tax effect of payroll deductions, they forget that compliance costs vary with state, and they almost never show their work.

We work with S-corp owners every single day. The math below reflects the way we actually model the election in our discovery calls, with the same inputs we use in a real client analysis. Look — if you’re sitting on the fence about converting, this article should let you eyeball your own situation in about ten minutes.

#The mechanism, in one paragraph

A default LLC (single-member taxed as a sole prop, multi-member taxed as a partnership) pays self-employment tax on 100% of net business income at 15.3% (12.4% Social Security up to the wage base, 2.9% Medicare unlimited, plus 0.9% additional Medicare on wages above $200K single / $250K MFJ). An S-corp splits net income into W-2 wages (payroll-tax-bearing, same effective rate) and distributions (no SE tax, no FICA). The savings equal (net business income − reasonable comp) × payroll tax rate on that gap, minus the compliance cost of running payroll and filing an 1120-S.

That’s the whole game. Every variable in the calculation is one of: net income, reasonable comp, the payroll tax rate that applies on each dollar of the gap, and the cost of the structure.

#The constants we’re using for 2026

Variable	2026 value
Social Security wage base	$176,100
SS rate (employee + employer)	12.4% combined (6.2% each side)
Medicare rate (employee + employer)	2.9% combined (1.45% each side)
Additional Medicare (wages > $200K single)	0.9% employee only
SE tax effective rate	15.3% on first $176,100 of SE income; 2.9% above (plus 0.9% high-earner)
SE tax deduction	Half of SE tax deductible above the line on Form 1040 Schedule 1
Federal income tax brackets (MFJ)	12% / 22% / 24% / 32% / 35% / 37%
Compliance cost (typical)	$1,800–$3,600/yr (Gusto payroll + 1120-S prep + state UI)

Texas (where most ETS clients sit) has no state income tax, so the comparisons below ignore state-level differences. If you’re in California, New York, or another high-tax state, the federal math holds but state franchise-tax minimums shrink the net savings by $400–$1,000/yr.

#Income level 1 — $60,000 net business income

LLC default treatment:

• SE tax base = $60,000 × 92.35% = $55,410
• SE tax = $55,410 × 15.3% = $8,478
• Half deducted from AGI = $4,239
• Federal income tax (MFJ, standard deduction $31,500, no other income) = roughly $1,800
• Total federal tax = $10,278

S-corp treatment (reasonable comp $30,000, distribution $30,000):

• Payroll tax on $30K W-2 = $30,000 × 15.3% = $4,590 (half employee, half employer)
• Payroll tax on $30K distribution = $0
• Federal income tax effect: corporation deducts $30K wages + $2,295 employer FICA from net, leaving $27,705 of K-1 income. Owner’s W-2 + K-1 = $57,705. Standard deduction $31,500. Taxable income ~$26,205. Federal income tax = ~$2,640 (after QBI deduction on K-1 portion).
• Compliance cost ~$2,000

Annual savings: roughly $1,400 before compliance cost. Net savings: ~$0–$200/yr.

This is the lower end of the gray zone. At $60K, the structure barely pays for itself and the operational complexity (running payroll, quarterly 941s, year-end W-2 + 1120-S filings) usually isn’t worth the trouble. We’ll typically recommend staying on Schedule C until net income crosses $75K consistently.

#Income level 2 — $100,000 net business income

LLC default treatment:

• SE tax base = $100,000 × 92.35% = $92,350
• SE tax = $92,350 × 15.3% = $14,130
• Half deducted = $7,065
• Federal income tax (MFJ, standard deduction) on $92,935 AGI = roughly $7,200 (after QBI deduction)
• Total federal tax = $21,330

S-corp treatment (reasonable comp $50,000, distribution $50,000):

• Payroll tax on $50K W-2 = $7,650
• Federal income tax: K-1 of $46,175 (after employer FICA), W-2 of $50K, AGI ~$96,175. Standard deduction $31,500. Taxable income ~$64,675. Federal income tax ~$7,400 (after QBI on K-1 portion).
• Compliance cost ~$2,000

Annual savings: roughly $5,800 before compliance cost. Net savings: ~$3,800/yr.

This is the cleanest “yes” zone. Almost every owner clearing $100K consistently should be on the S-corp track. The savings compound year over year and the operational structure stops feeling burdensome after the first 90 days.

#Income level 3 — $150,000 net business income

LLC default treatment:

• SE tax base = $150,000 × 92.35% = $138,525
• SE tax = $138,525 × 15.3% = $21,194
• Half deducted = $10,597
• Federal income tax (MFJ) on ~$139,400 AGI = roughly $14,500 (after QBI)
• Total federal tax = $35,694

S-corp treatment (reasonable comp $70,000, distribution $80,000):

• Payroll tax on $70K W-2 = $10,710
• Federal income tax: K-1 of $74,645 (after employer FICA), W-2 of $70K, AGI ~$144,645. Federal income tax ~$14,600 (after QBI on K-1 portion).
• Compliance cost ~$2,200

Annual savings: roughly $9,200 before compliance cost. Net savings: ~$7,000/yr.

This is where most of our 1099 medical contractors and solo agencies land. The election pays for itself in the first quarter every year.

#Income level 4 — $250,000 net business income

This is where the Social Security wage base ceiling starts to matter. At $250K net, an LLC owner is paying SS tax on the full $176,100 cap and Medicare on the entire $250K of SE income.

LLC default treatment:

• SS portion = $176,100 × 12.4% = $21,836
• Medicare portion = ($250,000 × 92.35%) × 2.9% = $6,696
• Additional Medicare (above $200K wages threshold doesn’t apply because SE income isn’t wages) = $0 on SE income itself, but 0.9% applies to combined wages + SE above $200K single / $250K MFJ — for MFJ at $250K combined, ~$0
• Total SE tax = $28,532
• Half deducted = $14,266
• Federal income tax (MFJ, standard deduction) on ~$235,734 AGI = roughly $35,000 (after QBI; assumes under SSTB phase-out)
• Total federal tax = $63,532

S-corp treatment (reasonable comp $115,000, distribution $135,000):

• Payroll tax on $115K W-2 = $17,595 (all in SS + Medicare; below the cap)
• Federal income tax: K-1 of $126,205, W-2 of $115K, AGI ~$241,205. Federal income tax ~$36,200 (after QBI).
• Compliance cost ~$2,400

Annual savings: roughly $14,500 before compliance cost. Net savings: ~$12,100/yr.

#Income level 5 — $500,000 net business income

At $500K net, both the LLC owner and the S-corp owner are well past the Social Security wage base. The savings calculation now centers on the 2.9% Medicare differential on the distribution portion, plus the 0.9% additional Medicare for high earners.

LLC default treatment:

• SS portion = $176,100 × 12.4% = $21,836
• Medicare portion = $461,750 × 2.9% = $13,391
• Additional Medicare (assume MFJ, combined wages + SE > $250K) = ($461,750 − $250,000) × 0.9% = $1,906
• Total SE-related tax = $37,133
• Half deducted = $18,567 (additional 0.9% not deductible)
• Federal income tax (MFJ) on ~$481,433 AGI = roughly $108,000 (assumes QBI phase-out partial)
• Total federal tax = $145,133

S-corp treatment (reasonable comp $180,000, distribution $320,000):

• Payroll tax on $180K W-2 = $21,836 (SS to cap) + $5,220 (Medicare on full $180K) + $0 add’l Medicare (under thresholds at this single-source) = ~$27,056
• Wait — at $180K W-2 + $320K K-1 = $500K AGI, additional Medicare applies to W-2 wages above $250K (MFJ): $0 because W-2 alone is $180K. But the 3.8% NIIT applies to distribution income above $250K MFJ — $250K × 3.8% = $9,500.

Hmm, the NIIT angle is important here and frequently misunderstood. Distributions to an active S-corp shareholder are generally NOT subject to NIIT under §1411 because they’re considered nonpassive income. So actively-managed S-corp distributions escape NIIT. That’s a separate benefit on top of the SE tax savings.

• Net payroll tax on $180K W-2 = ~$27,056
• Federal income tax: K-1 of $300,180 (after employer FICA), W-2 of $180K, AGI ~$480,180. Federal income tax ~$108,500.
• Compliance cost ~$3,000

Annual savings: roughly $22,400 before compliance cost (and before considering the NIIT-avoidance benefit, which can add another $8K–$12K for some structures). Net savings: ~$19,400/yr.

#Income level 6 — $1,000,000 net business income

At $1M net, the marginal savings dollar is the 2.9% Medicare + 0.9% additional Medicare on each distribution dollar above reasonable comp. Plus the NIIT-avoidance benefit on actively-managed distributions.

LLC default treatment:

• SS portion = $176,100 × 12.4% = $21,836
• Medicare = ($1,000,000 × 92.35%) × 2.9% = $26,782
• Additional Medicare = ($923,500 − $250,000) × 0.9% = $6,062
• Total SE-related tax = $54,680
• Half SS+Medicare deducted = $24,309 (additional Medicare not deductible)
• Federal income tax (MFJ, top bracket 37%) on ~$975,691 AGI = roughly $282,000 (QBI fully phased out for most SSTBs at this level)
• NIIT on portion of business income if passive = potentially $0 if active
• Total federal tax = $336,680

S-corp treatment (reasonable comp $280,000, distribution $720,000):

• Payroll tax on $280K W-2 = $21,836 (SS cap) + $8,120 (Medicare on $280K) + $720 (add’l Medicare on $280K-$250K threshold for MFJ × 0.9%) = ~$30,676
• Federal income tax: K-1 of ~$700,000 (after employer FICA $14K), W-2 of $280K, AGI ~$980,000. Federal income tax ~$285,000.
• NIIT on distribution: $0 (actively managed)
• Compliance cost ~$3,600

Annual savings: roughly $30,800 before compliance cost. Net savings: ~$27,200/yr.

At this income level the S-corp is no longer optional — it’s malpractice not to have one. The cumulative tax savings over a five-year period are six figures.

#Side-by-side summary table

Net business income	LLC total federal tax (approx)	S-corp total federal tax (approx)	Annual savings (gross)	Compliance cost	Net annual savings
$60,000	$10,278	$8,830	~$1,450	$2,000	~$0
$100,000	$21,330	$15,500	~$5,800	$2,000	~$3,800
$150,000	$35,694	$26,500	~$9,200	$2,200	~$7,000
$250,000	$63,532	$49,000	~$14,500	$2,400	~$12,100
$500,000	$145,133	$122,700	~$22,400	$3,000	~$19,400
$1,000,000	$336,680	$305,800	~$30,800	$3,600	~$27,200

Numbers are rounded for clarity and use simplified federal-only assumptions. Your actual savings depend on state income tax, QBI eligibility, retirement contributions, health insurance treatment, and a dozen other variables.

#What the table doesn’t capture

The S-corp election produces several second-order benefits that show up in the model but never in the headline tax savings number:

Retirement contribution capacity. A Solo 401(k) employer profit-sharing contribution is 25% of W-2 wages. At $180K reasonable comp, that’s $45K of additional tax-deferred space — worth roughly $14,400 in federal tax savings at the 32% bracket. See the Solo 401(k) stacking article.

Accountable plan reimbursements. $5K–$15K/yr of tax-free reimbursement for home office, vehicle, phone, internet. See the accountable plan article.

§162(l) health insurance deduction. Above-the-line deduction for premiums, no payroll tax. See the >2% shareholder health insurance article.

NIIT avoidance on actively-managed distributions. 3.8% on investment income above $250K MFJ; actively-managed S-corp distributions are exempt.

PTET election (state SALT workaround). In 36 states (not Texas) the S-corp can elect to pay state income tax at the entity level, deducted federally as an ordinary business expense — bypassing the $40K SALT cap. See the PTET election article.

Layering these on top, the total tax efficiency improvement for a $300K-net owner is typically $20K–$35K/yr, not just the headline $14K–$15K SE tax savings.

#Common questions

Why is the savings curve flat above $176,100? That’s the Social Security wage base. SS tax (12.4%) stops applying to additional wages or SE income above that threshold. Above the cap, only the 2.9% Medicare differential (plus 0.9% additional Medicare for high earners) drives the savings — so each marginal distribution dollar saves about 3.8 cents instead of 15.3 cents.

Does the savings work the same for spouses or partnerships? For a single-member LLC switching to S-corp, yes. For a multi-member LLC, the math gets more complex because the partnership already allocates SE income via guaranteed payments + distributive shares. We model multi-owner conversions separately during discovery.

What about state income tax effects? Texas, Florida, Nevada, Tennessee, and a handful of other states have no personal income tax, so the federal-only math holds. In California, the S-corp pays a 1.5% franchise tax on net income with an $800 minimum. New York City has an unincorporated business tax that doesn’t apply to S-corps but the city S-corp tax (8.85%) applies instead. Net state effect is usually $400–$2,000/yr negative — not large enough to flip the decision, but enough to model.

How accurate are these numbers for my situation? The directional math is solid. The exact dollar figures depend on filing status, other income sources, deduction levels, and credits. We always run client-specific numbers during the discovery call rather than relying on generic tables. Free advice either way.

What if my reasonable comp is genuinely 80% or 90% of net? Then the S-corp savings are smaller because most of the income is wages anyway. This is common for high-skilled service providers who do the work themselves (physicians, attorneys, consultants). The election still typically saves $5K–$12K/yr at $250K+ net, but the cleaner argument shifts to retirement plan capacity, NIIT avoidance, and other structural benefits.

Does the QBI deduction change the math? Yes, in two directions. (1) QBI for non-SSTB pass-through income above the 2026 threshold ($241,950 single / $483,900 MFJ) is tied to W-2 wages — sometimes paying higher salary unlocks more QBI. (2) For SSTBs (medicine, law, consulting, financial services, etc.), QBI phases out above the same thresholds regardless of structure. We model QBI explicitly in every S-corp analysis.

What’s the cleanest way to test the math for my own numbers? Pull your last full-year P&L. Take net income. Subtract a realistic reasonable comp number for your role. Multiply the remainder by 15.3% if you’re under $176,100 wages, or 2.9% if you’re over. Subtract $2,500 compliance cost. That’s your floor savings — actual will be higher once retirement, accountable plan, and §162(l) layer in.

When does the election become time-sensitive? Late March (the standard filing deadline). After that, you’re filing a late election under Rev. Proc. 2013-30 — still works, still gets approved almost universally, but the paperwork is more involved. See the late election article.

How do I know if my reasonable comp is defensible? Industry-specific wage benchmarks (BLS, RCReports, specialized surveys), documented in a written memo before the first paycheck runs. See the reasonable comp documentation article.

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If your net business income is north of $80K and you’re still on Schedule C or a partnership return, the math is almost certainly in your favor. We don’t do surprises — the Discovery call walks through your actual numbers and tells you straight whether the election will pay for itself. Free advice either way.