Compare total tax burden between C-Corp and S-Corp structures based on your business income and personal tax rate.
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A Texas-based freelance graphic designer earns $140,000 net profit/year from client work. She's evaluating whether to stay as a sole proprietor, form an LLC, or elect S-Corp status to reduce self-employment taxes.
Takeaway: S-Corp saves $8,300/year but adds ~$1,500-$3,000 in accounting fees (payroll, extra returns). Break-even is around $80-90K net profit. Below that, the overhead eats the savings. Texas has no state income tax, so the benefit is purely federal SE savings.
LLC annual fees range from $0 (Ohio) to $800 minimum (California, even for zero-revenue LLCs). Delaware C-Corp is standard for VC-backed companies but adds registered agent costs (~$300/yr) for out-of-state entities. The "best" structure is state-specific.
S-Corps cannot have more than 100 shareholders, cannot have non-US shareholders, and cannot have corporate shareholders. Violating these rules (e.g., adding a foreign investor) terminates S-Corp status retroactively, potentially creating a large unexpected tax event.
The IRS requires S-Corp owner-employees to pay themselves a "reasonable salary" before taking distributions. There is no fixed formula — the IRS looks at industry benchmarks, duties, and hours worked. Setting the salary too low is a common audit trigger for S-Corps.
Business break-even models track revenue vs. direct costs. They rarely factor in the owner's time as a cost. If you're working 60 hours/week at imputed $50/hour, your "profitable" business may be paying you $12/hour after the opportunity cost calculation.
Break-Even CalculatorA service business valued on EBITDA multiples (2-4×) gets a very different number than one valued on SDE (seller's discretionary earnings) or discounted cash flow. Buyers and sellers typically use different methods to argue their preferred price. This calculator uses a single method.
Business Valuation CalculatorBased on your inputs
estimated annual tax savings
| C-Corp Corporate Tax (21%) | $42,000 |
|---|---|
| C-Corp Dividend Tax | $37,604 |
| C-Corp Total Tax | $79,604 |
| S-Corp Payroll Tax | $6,120 |
| S-Corp Pass-Through Income Tax | $46,531 |
| S-Corp Total Tax | $52,651 |
⚠️ Consult a CPA before choosing your entity. State taxes and other factors apply.
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C-Corps face double taxation: the corporation pays 21% federal tax on profits, then shareholders pay tax again on dividends. S-Corps pass income directly to shareholders, avoiding corporate-level tax.
Small businesses with fewer than 100 shareholders who want pass-through taxation and to avoid double taxation. Also useful when owners take a salary to reduce self-employment tax.
Companies seeking venture capital, planning to go public, or retaining profits in the business. C-Corps allow unlimited shareholders and multiple share classes.
Yes. S-Corp owners pay themselves a reasonable salary (subject to payroll tax) and take remaining profits as distributions, which are not subject to self-employment tax.
The IRS requires S-Corp owners to pay themselves a 'reasonable' salary comparable to what an unrelated employer would pay for similar work. Industry benchmarks and local wages are common standards used.
Yes. File IRS Form 2553 by March 15 for the current tax year. All shareholders must consent. Built-in gains tax may apply for 5 years on assets that appreciated before the conversion.
S-Corp owners may deduct up to 20% of qualified business income under Section 199A. This deduction phases out for service businesses above $182,100 (single) or $364,200 (married filing jointly).
S-Corps are limited to 100 shareholders, all of whom must be US citizens or resident aliens. C-Corps have no shareholder limits and can include foreign investors and institutional shareholders.
Double taxation means corporate profits are taxed first at the 21% corporate rate, then taxed again as dividends when distributed to shareholders at 0-23.8% capital gains rates, resulting in combined rates up to 39.8%.
An LLC is a legal entity type offering liability protection. An S-Corp is a tax election any LLC or corporation can make by filing Form 2553. Many small businesses form an LLC and then elect S-Corp tax status to combine liability protection with payroll tax savings.
C-Corp Tax: Net Income × 21% + Dividends × 23.8%
S-Corp Tax: Salary × 7.65% (payroll) + Income × personal rate
Every formula on this page traces to a federal agency, central bank, or peer-reviewed institution. We cite the rule-makers, not secondhand blogs.
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Calculations are for educational purposes only. Consult a qualified financial advisor for personalized advice.