How much money will your business make this year? $
What percentage of this will be paid to you as salary?
(for example, you could pay yourself 70% of the above as salary and pay the rest to yourself in the form of a distribution)
   %
Click "calculate" to show your savings. (see the boxes below)  
Sole Proprietorship "S" Corporation
Your
Annual
Earnings
Total Self
Employment
Taxes
Earnings
Paid As
Salary
Earnings
Kept In
Business
Or Paid
As A
Dividend

Total Self
Employment
Taxes
Your
Annual
Tax
Savings
$$$
$ 
$ 
$ 
$ 
$ 
$ 

Explanation

An important issue to consider when deciding the structure of your business is self-employment tax. Self-employment (SE) tax is a 15.3% tax on income.

This rate, 15.3%, is a total of 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

The SE tax rate for business owners is 15.3% tax of the first $94,200 of income and 2.9% of everything over $94,200.

SELF EMPLOYMENT TAX
Type of Tax Tax Base Rate Maximum Tax
Social Security $94,200 12.4% $11,680.80
Medicare no limit 2.9% no limit

Normally these taxes are withheld by your employer. However, if you are self employed, it is your responsibility to pay them yourself.

S corporations have a significant advantage when it comes to the payment of SE taxes. In an S corporation, only the salary actually paid out an owner/employee as compensation for services is subject to SE tax. Any money left in the business for reinvestment or distributed to the shareholder as a dividend is not subject to payroll taxes...and not subject to self-employment tax.

Owners of sole proprietorships, partnerships and LLCs however, pay SE tax on their respective share of profits rather than salary. (Certain types of LLC income, however, are not subject to self-employment tax. For example, rentals from real estate and capital gains are not considered to be self-employment income, so real estate LLCs often need not be concerned with self-employment tax.)

Here's an example: Say you have net income of $90,000 and pay yourself $60,000 in salary, leaving $30,000 in the business to pay for equipment. As a sole proprietor, you would pay self-employment tax on the full $90,000 ($90,000 x 15.3% = $13,770). But as an S corporation, you would only owe self-employment tax on the $60,000 in salary ($60,000 x 15.3% = $9,180), resulting in a savings of $4,590.