S-corp salary calculator
Two questions that only mean something together: what a wage saves in payroll tax, and whether that wage is one you could defend. Most calculators answer the first and leave you to guess at the second.
Why the wage is the whole question
An S-corporation splits what an owner takes out into wages, which carry payroll tax, and distributions, which do not. Every dollar moved from the first to the second saves 15.3% — until the Social Security wage base, after which only the 2.9% Medicare portion is left and the saving largely stops. That cliff is why a figure extrapolated from a modest salary overstates what a larger one is worth.
The limit on moving dollars is that the wage has to be reasonable. Treasury Regulation §1.162-7(b)(3) puts it as the amount that would ordinarily be paid for like services by like enterprises under like circumstances, and the IRS may reclassify distributions as wages when it is not — with the employment tax, penalties, and interest that follow.
What “reasonable” is measured against
The IRS’s Reasonable Compensation Job Aid for Valuation Professionals names three approaches and is unusually direct about their standing: the market approach is “the most commonly used method” and the courts favour it, while the cost or “many hats” approach is “the least used method.” Popular write-ups tend to reverse that order, which is why this page leads with the occupation comparison and offers the role split as support rather than as the headline.
The same document disclaims itself: it is “not an official pronouncement of law” and cannot be cited as authority. Nothing derived from it — here or anywhere — carries the agency’s endorsement, and any tool implying otherwise is overstating what exists.
What this page does not do
It compares payroll taxes only. A sole proprietor deducts half their self-employment tax from income while an S-corporation deducts only the employer half on wages, so the income tax side moves slightly against the S-corp and the saving shown here is an upper bound. It also takes no view on state-level entity taxes, which several states levy on pass-through entities.
And it does not tell you what to pay yourself. It shows what a wage costs, what comparable work pays, and which of the twelve factors you could evidence — which is the shape of the argument, not the answer.
Common questions
What is a reasonable salary for an S-corp owner?
There is no single figure in law. The IRS asks what the company would have to pay somebody else to do the same work, so the answer is occupation-specific: BLS median wages are the evidence the IRS and the courts reach for. An owner-employee doing the full job full-time generally argues from that median upward.
How much does an S-corp election actually save?
The saving is the self-employment tax on profit taken as distributions rather than salary, minus the cost of running the entity: payroll filings, a separate return, and in some states a franchise or entity-level tax. Below roughly $60,000 of profit those costs usually swallow the saving.
What happens if I pay myself too little?
The IRS can recharacterise distributions as wages and assess back payroll tax, interest and penalties. What survives examination is not a number but a record: hours actually worked, duties actually performed, and evidence of what a replacement would cost in your market. Document the reason before you need it.
Does my state tax the S corporation itself?
Some do. A handful charge a franchise tax, a minimum tax, or an entity-level tax on the corporation in addition to the tax you pay personally, which changes the arithmetic of the election. This calculator models the states it has verified figures for and says so where it has none.
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