Tax Calculation Methodology

Last Updated: April 2026 | Transparency Report

This page provides a full technical breakdown of how our calculator estimates your potential tax savings. We believe that financial tools should be transparent about their logic, assumptions, and limitations.

Important Professional Notice:

The formulas below are based on general IRS and state guidelines. They do not account for every possible tax credit, deduction, or industry-specific rule. These estimates should be used as a starting point for a conversation with a qualified CPA or tax professional.

1. Formulas Used

Our methodology is designed to reflect the primary tax difference between a standard LLC and an S-Corporation: the application of self-employment (SE) taxes.

Standard LLC (Self-Employment Tax)

For a single-member LLC, the IRS assesses self-employment tax on 92.35% of your net profit. The formula used is:

LLC_SE_Tax = (Net_Profit * 0.9235) * 0.153

Note: This includes the 12.4% Social Security tax (capped at $184,500 for the 2026 tax year) and 2.9% Medicare tax (uncapped).

S-Corporation (Payroll Tax)

Under an S-Corp, you only pay payroll taxes on the W-2 salary portion of your income. The formula used is:

S_Corp_Payroll_Tax = Salary * 0.153

Note: This assumes the corporation pays both the employer and employee portions of the payroll tax. Distributions taken above this salary are exempt from the 15.3% tax.

2. Core Assumptions

To provide a realistic comparison, the calculator makes the following assumptions:

  • Reasonable Salary: When not manually entered, the calculator assumes a salary between 35% and 50% of net profit based on your selected profession.
  • Maintenance Costs: We assume a flat $2,000 annual cost for S-Corp maintenance (payroll software, tax preparation, and corporate filing fees).
  • California Adjustment: For businesses in California, we add the $800 minimum franchise tax to the S-Corp maintenance estimate.

3. Explicit Limitations (What is NOT Included)

To keep the tool fast and accessible, certain complexities are excluded from the current model. Your actual results may vary based on these factors:

  • Section 199A QBI Deduction: The complex 20% Qualified Business Income deduction is NOT calculated, as it depends on total household taxable income and specific trade type.
  • Local/City Taxes: Local income taxes (e.g., NYC, Philadelphia) are NOT included in the state tax estimate.
  • State Payroll Taxes: While state income tax is modeled, specific state payroll taxes (like SUI or ETT) are NOT fully modeled beyond the flat maintenance estimate.
  • Unemployment Insurance: Federal (FUTA) and State (SUI) unemployment insurance costs are NOT included in the payroll tax formula.
  • Variable CPA Costs: Actual accounting and tax preparation costs vary significantly by region and business complexity.
  • Reasonable Salary Determination: This calculator provides an estimate for modeling purposes only; it does NOT determine a "legal" or "audit-proof" reasonable salary for your specific business.

4. Data Sources

Our models are built using data from the following authoritative sources:

5. Educational Use Disclaimer

All estimates generated by this tool are for educational and planning purposes only. They do not constitute professional filing advice, nor do they replace the need for a consultation with a licensed tax professional before making entity formation or tax election decisions.