About this tool
Salary or dividends: the owner's classic dilemma
If you own and run your own corporation, you get to decide how the money leaves the business. Pay yourself a W-2 salary and the wages are deductible for the company but hit by payroll taxes and ordinary income tax rates. Take dividends from a C corporation instead and you skip payroll taxes entirely, but the profits are taxed twice: once at the corporate level and again in your own return. This calculator puts the same gross figure through both routes and shows you two numbers that actually matter — what lands in your bank account, and what the company had to give up to get it there. In practice most owner-managed companies are S corporations that pay a salary and take the rest as distributions that are not taxed again; the dividend column here models the C-corporation alternative, where profit is taxed at the company and then a second time as a dividend.
How the calculation works
The salary route is modelled the way an S corporation owner-employee is normally paid. Social Security costs 6.2% of wages up to the $184,500 wage base for 2026, Medicare costs 1.45% with no ceiling, and the company matches both, so the combined FICA bill is 15.3% on the first slice of pay. An extra 0.9% Additional Medicare Tax applies to wages above $200,000 for a single filer, and that one is not matched by the employer. Federal income tax then runs through the 2026 brackets — 10%, 12%, 22%, 24%, 32%, 35% and 37% — after the $16,100 single standard deduction.
The dividend route is modelled as a C corporation. Profits first pay the flat 21% federal corporate income tax. Whatever is left can be distributed, and qualified dividends are taxed at 0%, 15% or 20% depending on your taxable income, with the 3.8% net investment income tax layered on above $200,000 of modified AGI. The calculator works backwards from the distribution you type in to find the pre-tax profit the company needs, so the "total cost" column is directly comparable between the two options. State taxes are excluded.
A worked example
Say you want $120,000 of gross income, as a single filer with no other income. As salary from an S corp, the company pays about $129,200 once the employer half of FICA ($9,180) is added. You lose the same $9,180 in employee payroll tax and about $17,600 in federal income tax after the standard deduction, leaving roughly $93,300 in hand. As a C corp dividend, distributing $120,000 takes about $151,900 of pre-tax profit because of the 21% corporate tax. The first $49,450 of taxable income falls in the 0% qualified-dividend bracket and the rest is taxed at 15%, so you pay about $8,200 and keep roughly $111,800 — far more in your pocket than the salary route, but the company gives up about $23,000 more and none of it builds Social Security. Add other income, or a state income tax, and the gap narrows quickly.
Trade-offs to weigh
Salary buys you things dividends never will. Wages generate Social Security earnings credits that determine your future retirement benefit, they create the compensation base you need to fund a Solo 401(k) or SEP-IRA, and mortgage underwriters treat a steady W-2 far more kindly than a lumpy distribution. Salary is also a deductible business expense, which is exactly why the S corporation structure — reasonable salary plus distributions — is so widely used by profitable small businesses. To estimate a Social Security retirement benefit, see the Social Security calculator.
Dividends avoid payroll tax entirely, and qualified dividend rates are meaningfully lower than ordinary rates for most owners. The catch is double taxation in a C corp and the IRS's reasonable compensation rule in an S corp: you cannot pay yourself a token $10,000 salary and take $200,000 in distributions. The IRS looks at your role, hours, experience and what a comparable employee would earn, and recharacterisation comes with back payroll tax, interest and penalties. Distributions also need basis and retained earnings to draw on.
Practical guidance
Most owner-operators land on a blend: a defensible salary benchmarked against industry data, topped up by distributions when profit allows. Run the numbers again whenever your income changes materially, because crossing the Social Security wage base, the $200,000 Additional Medicare threshold, or a qualified dividend bracket can flip the answer. Also remember that this simulator covers federal tax only — a state with a 9% personal income tax or a corporate franchise tax can change the ranking of the two options entirely. Check the entity election too: an LLC taxed as a partnership, an S corp and a C corp behave very differently here.
Indicative simulation based on 2026 federal tax rules. It does not replace advice from a CPA or tax attorney.