S-Corp vs LLC: what the tax guy actually means by take a salary

Everyone tells you to form an S-Corp. Almost no one shows you the math.

Friend of mine hit six figures in freelance revenue last year. His accountant's first words were basically "congrats, we should make you an S-Corp." My friend nodded, like this was a well-known fact of life, and then texted me asking what an S-Corp actually does differently.

The short version: it splits your income into two buckets. The salary you pay yourself, which still pays self-employment tax. And the distribution on top, which doesn't. That split is the entire trick. As a single-member LLC you pay 15.3% on the whole pile. As an S-Corp you pay it on the salary, and the rest slips past the payroll tax.

Where the money actually goes

Let's use round numbers. Say net profit is $150,000 and you set your salary at $95,000, which is roughly what the position would pay at a normal job.

LLC route: 15.3% on all $150,000 comes to about $22,950.

S-Corp route: 15.3% on the $95,000 salary, plus Medicare on the rest in practice, lands around $14,500. The gap is just over $8,000. That's the number your accountant was circling.

The calculator on this site does that exact comparison, SS wage cap included, so you can stare at your real numbers instead of my made-up example.

The catch they don't lead with

That $8,000 is before you pay a payroll provider, file the extra returns, and maybe hire help to do it right. Call it $1,500 to $3,000 a year in compliance. Still ahead, usually. But the deeper catch is the salary itself.

Pay yourself $20,000 a year and the IRS notices. Not maybe. There are whole court cases about plumbers and one-man shops paying themselves nothing and treating everything as a distribution. The rule is a reasonable salary, which is a polite way of saying what you'd earn doing this exact job for someone else. Skimp on it, and the savings turn into back taxes, interest, and penalties, plus the audit.

This is why the S-Corp decision is a math problem with a human question stuck in the middle. The calculator can show you the tax gap; it can't tell you what a stranger would pay you to do your own job.

When the S-Corp stops paying

The SS wage cap does us one favor here. Once your salary crosses about $176,000 for the year, the Social Security half stops charging. At really high profit, the only remaining difference is the 2.9% Medicare piece, and the compliance cost starts looking less cute.

Low income, run the numbers. It sometimes comes out negative: the LLC is cheaper once payroll costs are in. High income, the S-Corp gap often shrinks. The sweet spot, weirdly, is the middle, where the salary is big enough to be reasonable and the profit above it is big enough to matter.

Run both columns with your own numbers. That's the entire value of doing this in the browser instead of nodding along in a meeting.