Sole Proprietorship Scenario:

• Self-employment tax calculated on 92.35% of net profit (15.3% rate = 12.4% Social Security + 2.9% Medicare)
• Social Security capped at $176,100 wage base for 2025 (combined with other W-2 wages)
• Additional Medicare tax (0.9%) on earnings above threshold ($250k MFJ, $200k others)
• Half of SE tax deductible as adjustment to income (Schedule 1)
• QBI deduction: 20% of qualified business income after SE deduction (subject to limitations)

S-Corporation Scenario:

• Reasonable salary subject to employer + employee FICA (6.2% + 6.2% SS; 1.45% + 1.45% Medicare)
• Social Security FICA capped at $176,100 wage base (combined with other W-2 wages)
• Additional Medicare tax (0.9%) applies to wages only, not K-1 distributions
• S-corp profit = business income - salary - employer FICA (passes through on K-1)
• QBI deduction: 20% of S-corp profit (W-2 wages not QBI-eligible)
• No SE tax on K-1 distributions (key savings driver)

Comparison & Net Savings:

• Employment tax savings = (SE tax + Addl Medicare SP) - (Total FICA + Addl Medicare SC)
• Income tax effects from QBI deduction differences and loss of half-SE deduction
• Net savings = Gross savings - Annual S-corp admin costs
• Guidance: Below ~$60k profit, S-corp rarely worthwhile after costs; above $60k, savings typically scale with income if salary set reasonably

Sources: IRS Publication 334 (Self-Employment), Topic 751 (FICA rates), Topic 560 (Additional Medicare), Form 8995 Instructions (QBI), 2025 Social Security wage base. This calculator provides estimates for educational purposes. Consult a tax professional for advice specific to your situation. Reasonable compensation is fact-specific; IRS considers duties, qualifications, time, industry norms, and other factors.