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LLC vs Sole Proprietor

Compare SE tax and the S-corp option.

Details

Results

S-corp SE/payroll tax
Sole prop / default LLC SE tax
Potential S-corp savings
Note

Educational estimate. State fees change — verify with the Secretary of State.

How it works

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

This surprises people: a default single-member LLC is taxed exactly like a sole proprietor — you pay 15.3% self-employment tax on all net profit. The LLC gives you liability protection, not a tax break. The tax savings come later, if you elect S-corp status and split your income into a reasonable salary (which owes payroll tax) plus distributions (which don’t).

When the S-corp election pays

Because only the salary owes the 15.3%, the distribution rides free of it — but you take on payroll filings, extra accounting and a "reasonable salary" requirement the IRS enforces. The election generally pays once profit comfortably exceeds a reasonable salary, often cited around $80k+. Run your numbers above, then confirm with a CPA.

Good to know

FAQs

Does an LLC reduce taxes?

Not by default — it's taxed like a sole proprietor. Savings come from an S-corp election.

What is a reasonable salary?

A wage comparable to the role's market rate; the IRS scrutinizes lowball salaries.

When is an S-corp worth it?

Often once profit comfortably exceeds a reasonable salary (commonly ~$80k+).

Is this tax advice?

No — confirm with a CPA.