Illustrative S-Corp Scenario Calculator
Explore an illustrative scenario model comparing Sole Proprietorship SECA taxes against an S-Corporation structure with W-2 wages and shareholder distributions.
In this illustrative scenario, splitting $160,000 profit into a $96,000 assumed W-2 salary and $64,000 in distributions reduces self-employment tax on non-wage profit.
Illustrative scenario model only. S-Corporation reasonable compensation is determined on an individual facts-and-circumstances basis under IRS guidelines (Rev. Rul. 59-221, Rev. Rul. 74-44, David E. Watson, P.C. v. United States); the 60% baseline is an illustrative scenario, not an IRS safe harbor. Not tax advice. Sponsored partner link.
1. SECA Exemption on Distributions
While W-2 salary is subject to standard FICA payroll taxes (up to statutory limits), bona fide shareholder distributions are not subject to self-employment tax.
2. Compliance & Overhead Trade-Off
S-Corporations require separate corporate tax returns (Form 1120-S), payroll processing, and state entity fees (~$2,500+/yr), which must be weighed against potential tax savings.
3. Facts-and-Circumstances Salary
IRS guidelines (Rev. Rul. 59-221, Rev. Rul. 74-44) require paying reasonable W-2 compensation based on training, duties, and market rates before taking distributions.
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