Frequently Asked Questions
How does splitting profit into salary and distribution save tax?
Distributions are not subject to Social Security and Medicare tax, so shifting profit from W-2 salary to distribution lowers payroll tax, as long as the salary remains reasonable.
What is a reasonable salary?
It should reflect what you would pay someone else to do your job, based on industry, experience, and hours worked. The IRS can reclassify distributions if the salary is unreasonably low.
How is the payroll tax calculated?
Social Security at 12.4 percent applies to salary up to the annual wage base, and Medicare at 2.9 percent applies to all salary. The tool compares this on the chosen salary versus the full profit.
Is this tax advice?
No. It is a general estimate and is not tax, financial, or legal advice. A reasonable-salary determination should be made with a tax professional.
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General information only. Not tax advice.
Tax Disclaimer: General information only. Not tax advice.
This calculator provides general tax information for educational purposes and is not tax advice. Tax laws change and vary by jurisdiction and individual circumstances. Consult a qualified tax professional or CPA for advice on your specific situation.