LLC vs S-Corp vs Sole Proprietor Calculator

Why Entity Choice Shapes Take-Home Pay

Choosing between operating as a sole proprietor, forming a limited liability company with default taxation, or electing S-corporation status is about more than paperwork. The structure influences payroll taxes, deductible fringe benefits, audit risk, retirement plan contributions, and even the valuation of your enterprise. Sole proprietors and most single-member LLCs report profits on Schedule C and pay self-employment tax on the entire net income. That 15.3 percent levy covers both the employer and employee side of Social Security and Medicare taxes, and while the employer portion is deductible, the cash still leaves your bank account. S corporations, in contrast, divide earnings into salary and distributions. Only the salary is subject to payroll taxes, potentially lowering total payroll costs when a reasonable wage is set. Understanding how these pieces interact helps you decide whether the additional compliance burden of an S-corp election is justified by the potential savings.

This calculator accepts your net profit before owner salary so that the comparison begins with the same economic pie. For the sole proprietor scenario, the entire amount is treated as self-employment income. The tool applies the self-employment tax rate to derive the FICA burden and then subtracts half of that amount before applying your combined income tax rate, mirroring how Schedule SE feeds into Form 1040. LLC default taxation behaves identically for tax purposes, but most states impose annual registration fees or franchise taxes; we include a field for those recurring costs. For the S corporation scenario, we subtract the proposed salary and administrative costs to determine the distribution pool. Payroll taxes apply only to the salary figure, while income tax applies to the full business profit less deductible admin expenses. Fringe benefits such as health insurance premiums can be run through the S corporation as pre-tax expenses, which is why the calculator asks for eligible benefits. They reduce taxable income and increase the owner’s effective take-home value even though they are not cash in hand.

The output table presents total taxes and fees alongside net take-home pay for each structure. These numbers help you answer real-world questions: How much cash will be available for quarterly estimated taxes? What is the breakeven point for forming an S corporation? How sensitive are the results to salary changes? Because the model is deterministic, you can update the salary input to test multiple reasonable compensation scenarios. Keeping a log of those scenarios is a best practice that demonstrates diligence if the IRS ever audits your S-corp distribution strategy. Many owners also use the tool to project upcoming payroll deposits and to benchmark the cost of compliance providers who handle payroll, tax filings, and entity maintenance.

Assumptions Built Into the Model

Every tax model requires simplifying assumptions. Here, the self-employment tax rate defaults to 15.3 percent, which is accurate for the first $160,200 of earnings in 2024 for Social Security plus unlimited Medicare. If your profit exceeds that cap, you can adjust the rate downward to reflect the diminishing Social Security portion, though remember that the 0.9 percent Additional Medicare Tax may apply for higher earners. The income tax rate combines federal, state, and local liabilities, assuming that the pass-through deduction and itemized deductions are either handled elsewhere or not a factor. For S corporations, we assume the payroll tax field represents the combined employer and employee portion; the calculator subtracts that amount once from the salary stream because the economic burden ultimately rests on the owner. Administrative costs include payroll services, tax preparation, reasonable compensation studies, and state franchise taxes associated with the election. If your state charges an LLC franchise tax regardless of S-corp status, split the value between the LLC and S-corp fields so that the comparison remains apples-to-apples.

The fringe benefit input recognizes that certain benefits are deductible for S corporations but not for sole proprietors. Health insurance premiums for more-than-two-percent shareholders are deductible but must be added back to wages for income tax purposes. Retirement contributions through a Solo 401(k) or SEP IRA may also vary by entity structure. While the calculator does not compute retirement plan limits, including the dollar value of employer-funded benefits in the fringe field ensures that your take-home comparison reflects the total value you extract from the business. You can set the value to zero if you prefer a cash-only analysis.

Interpreting the Results and Next Steps

After running the model, review which scenario provides the highest take-home pay. If the S corporation delivers significant savings, document the salary assumption and confirm that it aligns with industry benchmarks. Consider the qualitative factors too: S corporations require payroll filings, annual minutes in many states, and separate business bank accounts. LLCs offer liability protection but may still be treated as disregarded entities for tax purposes unless you elect S-corp status. Sole proprietorships are administratively simple but provide no liability shield. Many owners start as a sole proprietor or LLC and elect S-corp taxation once profits reach $60,000 to $80,000, which is often the breakeven point for covering administrative costs. Use the copy button to save your analysis and share it with your accountant when discussing the transition.

The calculator also exposes the sensitivity of your take-home pay to benefits planning. Increasing pre-tax benefits raises value even if cash distributions remain constant. Similarly, adjusting the salary input demonstrates how quickly payroll taxes erode savings when the salary approaches total profit. If you plan to hire employees or bring on partners, revisit the analysis because multi-owner S corporations must allocate salary and distributions proportionally, and guaranteed payments in partnerships create additional complexity. The model is meant to be interactive—save different versions for growth scenarios, new states, or changing tax rates.

Remember that taxes are only one dimension of the decision. Regulatory compliance, liability protection, investment attractiveness, and succession planning all play roles. LLCs are flexible for raising capital and can choose corporate taxation later. S corporations have ownership restrictions that may impede fundraising. Sole proprietors may face higher audit risk and difficulty separating personal and business credit. Once you narrow down the financial differences using this calculator, schedule time with a CPA or attorney to tailor the plan to your industry, state requirements, and long-term goals. Accurate bookkeeping and timely payroll filings are essential to preserving the benefits quantified by the tool.

Finally, keep historical copies of your calculations. If the IRS questions your reasonable compensation strategy or a lender requests cash-flow projections, providing documented analyses enhances credibility. Pair the insights from this calculator with scenario planning for estimated taxes, retirement contributions, and distributions to smooth your cash flow throughout the year. Thoughtful entity planning delivers more than tax savings—it creates clarity, reduces surprises, and aligns your business structure with the lifestyle you want to support.

To stress-test your numbers, run multiple scenarios that adjust for upcoming wage hikes, health insurance renewals, or the addition of a spouse on payroll. Save each copy with the date so you can reference how assumptions changed across the year. If you eventually sell the company, buyers will review historical compensation strategies to ensure that profits are sustainable; having transparent models bolsters negotiation leverage. You can also export the table to a spreadsheet and layer in retirement plan contributions, cash reserve targets, and quarterly tax payments for a holistic view of liquidity.

Consider pairing this calculator with scenario planning for the Qualified Business Income deduction. QBI rules interact with entity choice, wage levels, and health insurance benefits. An S corporation can optimize QBI by balancing wages and distributions, while an LLC taxed as a partnership may rely on guaranteed payments. By keeping the deduction in mind, you avoid inadvertently reducing a 20 percent tax break while chasing payroll savings. Consult IRS Form 8995 or 8995-A worksheets to see how wage and capital limitations line up with your modeled salary.

Compliance obligations evolve. States such as California and New York routinely update franchise fee schedules and reporting standards. Federal payroll thresholds change annually as Social Security wage bases climb. Build a calendar reminder to revisit this calculator each January with the new limits, and review it midyear if Congress enacts tax law updates. Treat the exercise like an internal audit of your compensation strategy, ensuring that numbers on W-2s, K-1s, and estimated tax vouchers remain aligned.