Sole Proprietor / LLC vs. S-Corp Tax Comparison (USA)
Understanding the tax differences between operating as a Sole Proprietor (or LLC taxed as a Sole Prop) and an S-Corporation is crucial for small business owners in the U.S. Key differences include how income is taxed, particularly regarding Self-Employment (SE) taxes vs. Payroll (FICA) taxes.
- Sole Prop / LLC (Taxed as SP): Net business income is generally subject to both income tax and SE tax. Owner draws are not salary.
- S-Corporation: Owner working for the business must be paid a reasonable W-2 salary subject to payroll taxes. Remaining net income is typically passed through and generally *only* subject to income tax (avoiding SE tax on that portion).
* Uses estimated 2025 federal Social Security (12.4% total) and Medicare (2.9% total) tax rates, and the 2024 Social Security wage base ($168,600). Uses user-provided estimated marginal income tax rate. Actual tax liability depends on many factors.
Enter Your Business and Tax Information
* For S-Corps, owner's salary must be "reasonable" and is subject to payroll tax. Salary cannot exceed Net Income Before Salary (Gross Income - Total Expenses).
* Use your estimated marginal federal income tax rate (the rate on your last dollar earned).
Sole Proprietor / LLC vs. S-Corp Tax Comparison Results
Estimated federal tax impact comparison based on your inputs for a hypothetical business scenario.
* Uses estimated 2025 SS/Medicare rates and 2024 SS wage base ($168,600). Uses user-provided estimated marginal income tax rate. Actual tax liability varies based on many factors.
** S-Corp owner salary must be reasonable and is subject to payroll tax. Remaining profit is generally not subject to SE tax.
Estimated Tax Comparison:
| Tax Item | Sole Proprietor / LLC (Taxed as SP) | S-Corporation |
|---|
Tax Difference (S-Corp Total Tax vs. Sole Prop/LLC Total Tax): $0.00 ()
Choosing the right business structure is one of the most critical decisions for any entrepreneur in the USA, and its tax implications are often the most impactful. Our free Sole Proprietor vs. LLC vs. S-Corp Tax Comparison Tool is designed to help you understand the distinct tax treatments of these common structures, empowering you to make an informed decision that optimizes your tax burden and protects your personal assets.
Let’s break down the general tax characteristics of each, remembering that personal circumstances and state laws can introduce variations:
Sole Proprietorship: This is the simplest and most common structure for single-owner businesses. For tax purposes, there’s no distinction between you and your business. All business income and expenses are reported directly on your personal tax return (IRS Form 1040, Schedule C). The entire net profit is subject to both ordinary income tax and self-employment tax (Social Security and Medicare), which is 15.3% on your net earnings up to a certain income threshold, and then 2.9% for Medicare on earnings above that. While simple, this means your personal assets are not protected from business liabilities.
Limited Liability Company (LLC): An LLC offers personal liability protection, separating your personal assets from your business debts. For federal tax purposes in the USA, an LLC is flexible and often defaults to “pass-through” taxation:
Single-Member LLCs are typically taxed by default as a sole proprietorship. All profits and losses pass through to the owner’s personal tax return, subject to income tax and the full self-employment tax.
Multi-Member LLCs are typically taxed by default as a partnership. The LLC files an informational return (IRS Form 1065) and issues Schedule K-1s to each member, who then report their share of profits and losses on their personal tax returns, also subject to income tax and self-employment tax on their share of the net earnings. The key benefit of an LLC over a sole proprietorship is the limited personal liability, while generally maintaining straightforward pass-through taxation
S Corporation (S-Corp): An S-Corp is not a business structure itself, but rather a tax election made by a corporation or an LLC. It combines the liability protection of a corporation with the pass-through taxation benefits of a sole proprietorship or partnership, specifically addressing the self-employment tax.
S-Corps are pass-through entities, meaning profits and losses are passed through to the owners’ personal tax returns. However, unlike sole proprietorships or default LLCs, an S-Corp owner who actively works in the business must take a “reasonable salary” as an employee. This salary is subject to payroll taxes (including Social Security and Medicare).
Any remaining profits can be distributed to the owner(s) as distributions (or dividends). These distributions are generally not subject to self-employment tax, which can lead to significant tax savings compared to a sole proprietorship or default LLC, especially for highly profitable businesses. This structure requires more administrative upkeep, including regular payroll, and specific IRS filing requirements (IRS Form 1120-S).
Our tool helps you input your estimated income and expenses to illustrate how these different structures can impact your federal income tax and self-employment tax burden in the USA. While this comparison provides valuable insights, it’s always recommended to consult with a tax professional for personalized advice to determine the best structure for your unique business needs.