Sole proprietor, LLC, or S-corp: how each is taxed

Q: Does forming an LLC change how I'm taxed?

By default, no. A single-member LLC is a 'disregarded entity' — the IRS taxes it exactly like a sole proprietorship, on Schedule C, with all profit subject to self-employment tax. An LLC gives you legal liability protection and a more formal business identity, but on its own it doesn't lower your taxes. What can change your taxes is electing to have the LLC taxed as an S-corp.

Q: How does an S-corp save on taxes?

With an S-corp election, you pay yourself a reasonable salary (W-2 wages, subject to Social Security and Medicare) and take remaining profit as distributions, which are not subject to self-employment tax. That can reduce the 15.3% SE tax you'd otherwise pay on all profit. The catch: you must run payroll, pay yourself a defensible 'reasonable' salary, and file a separate corporate return (Form 1120-S) — added cost and complexity that only pays off above a certain profit level.

Sole proprietor, LLC, and S-corp aren't three flavors of the same thing — they're a mix of legal structure and tax treatment. Here's how each actually affects what you owe.

Updated June 2026

Sole proprietorship

The default when you start working for yourself — no paperwork required. Your business profit flows onto Schedule C, and the full net profit is subject to self-employment tax (15.3%) plus income tax. Simple, but no liability separation between you and the business.

Single-member LLC

An LLC is a legal structure, not a tax one. By default the IRS treats a single-member LLC as a disregarded entity — taxed identically to a sole proprietorship (Schedule C, full self-employment tax). What you gain is liability protectionand a cleaner business identity; what you don't gain, by itself, is a lower tax bill.

S-corp election

An S-corp isn't a separate kind of company — it's a tax election a corporation or LLC can make. Here the math changes:

You pay yourself a reasonable salary as W-2 wages — that part is subject to Social Security and Medicare.
Remaining profit comes out as distributions, which are not subject to self-employment tax.
That split can cut the 15.3% you'd otherwise pay on all profit — the core S-corp tax benefit.

The trade-offs are real:

You must run actual payroll and withhold on your salary.
The salary has to be “reasonable” for your role — the IRS scrutinizes artificially low salaries used to dodge payroll tax.
You file a separate return (Form 1120-S) and typically pay for payroll and bookkeeping — costs that only pay off above a certain profit level.

A common path: start as a sole proprietor, form an LLC when you want liability protection, and consider the S-corp election once profit is consistently high. The S-corp break-even depends entirely on your numbers — run it past a CPA before electing.

The common thread

All three are pass-through— the business itself doesn't pay federal income tax; profit passes to your personal return. So good forecasting matters regardless of structure: you still need to know what you'll owe and set it aside. Taxottic forecasts that for sole proprietors, LLCs, and S-corps alike.

Frequently asked

Does forming an LLC change how I'm taxed?

By default, no. A single-member LLC is a disregarded entity— the IRS taxes it exactly like a sole proprietorship, on Schedule C, with all profit subject to self-employment tax. An LLC gives you legal liability protection and a more formal business identity, but on its own it doesn't lower your taxes. What can change your taxes is electing to have the LLC taxed as an S-corp.

How does an S-corp save on taxes?

With an S-corp election, you pay yourself a reasonable salary (W-2 wages, subject to Social Security and Medicare) and take remaining profit as distributions, which are not subject to self-employment tax. That can reduce the 15.3% SE tax you'd otherwise pay on all profit. The catch: you must run payroll, pay yourself a defensible “reasonable” salary, and file a separate corporate return (Form 1120-S) — added cost and complexity that only pays off above a certain profit level.

When should I consider an S-corp?

Usually once your net profit is consistently high enough that the self-employment-tax savings exceed the cost of payroll, bookkeeping, and a separate tax return — often discussed around the $40,000–$80,000+ profit range, but it depends entirely on your numbers and state. Because the reasonable-salary rules and break-even math are situation-specific, this is the decision most worth running past a CPA before you elect.

This guide is general information, not tax, legal, or accounting advice, and isn't a substitute for a licensed CPA or tax attorney. Tax rules change and depend on your situation; figures here are illustrative. Verify specifics against current IRS guidance or with your preparer.