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LLC vs Sole Proprietor

Compare SE tax and the S-corp option.

Details

Net business profit ($)

Filing status

Reasonable S-corp salary ($)

Results

S-corp SE/payroll tax,

Sole prop / default LLC SE tax,

Potential S-corp savings,

Note,

Ballpark comparison only. Your state may adjust its fee schedule at any time.

The Short Answer

Forming an LLC by itself does not lower your federal tax bill. The default LLC and a sole proprietorship pay identical self-employment tax. The only way to cut that bill is a separate step, electing S-corp tax treatment once profit clears a reasonable salary, which is what the numbers above compare.

How the Comparison Is Built

A default LLC pays self-employment tax on all profit like a sole proprietor. We compare that to S-corp payroll tax on a reasonable salary, showing potential savings.

The LLC isn't the tax break, the S-corp election is. Weigh it against extra paperwork.

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An LLC by itself doesn’t save tax

People expect the LLC to cut their tax bill. It does not. A default single-member LLC is taxed identically to a sole proprietorship: 15.3% self-employment tax on all net profit, reported on Schedule C and Schedule SE. What the LLC gives you is liability separation, not a lower tax rate. The tax savings come from a separate step, an S-corp election that lets you divide profit into a salary (which owes payroll tax) and distributions (which do not).

When the S-corp election pays

Only the salary portion owes the 15.3%, so the distribution escapes it. The tradeoff is real paperwork: payroll filings, a separate business bank account, extra accounting costs, and a salary the IRS expects to be comparable to market rate for the role. The election typically makes sense once profit comfortably clears a reasonable salary, a threshold many practitioners put around $80,000. Run the numbers above, then talk to a CPA before filing Form 2553.

This tool compares federal self-employment tax only. The one-time state filing fee to form the LLC itself is separate and ranges from $35 to $500 depending on state, see the 2026 filing fee dataset.

Good to know

FAQs

Does an LLC reduce taxes?

Not by default. A single-member LLC is taxed the same as a sole proprietorship: self-employment tax on all net profit. Savings come from an S-corp election, not from the LLC itself.

What is a reasonable salary?

A wage a business would pay someone else to do that work. The IRS scrutinizes S-corp salaries and can reclassify distributions as wages if the salary looks unreasonably low.

When is an S-corp worth it?

Generally once profit comfortably exceeds what counts as a reasonable salary for the work. Many CPAs cite around $80,000 as a practical starting point, though the actual threshold depends on your industry and location.

Is this tax advice?

No. These are estimates for planning. Confirm your situation with a CPA before making any elections or filing changes.

Does the state I form in change this comparison?

No, this comparison is federal self-employment tax only. State filing fees are a separate, one-time cost, see the LLC cost calculator for your state's figure.