LLC vs S-Corp vs Sole Proprietorship: Which Saves You the Most?
The biggest hidden tax bill for freelancers and self-employed? Self-employment tax — 15.3% on every dollar of profit. Choosing the right business structure can legally cut thousands from your tax bill. Here's when each makes sense.
Calculate your self-employment tax
The Self-Employment Tax Problem
When you work for an employer, FICA taxes (Social Security + Medicare) are split: you pay 7.65% and your employer pays 7.65%. When you're self-employed, you pay both halves — 15.3% on every dollar of net profit up to the Social Security wage base ($168,600 in 2024), plus 2.9% Medicare on everything above.
On $150,000 of net profit, that's $21,200 in SE tax alone — before income taxes. This is where business structure choices have real financial consequences.
⚠️ Note: An LLC by itself doesn't change how you're taxed. By default, a single-member LLC is taxed identically to a sole proprietorship. The tax savings come from electing S-Corp status — which any LLC or corporation can do.
Side-by-Side Comparison
The S-Corp Tax Savings: Real Numbers
The S-Corp strategy: pay yourself a "reasonable salary" (say $60k) and take the rest as distributions. You pay SE tax on the salary but not on distributions. Here's the math at different income levels:
*Simplified illustration. Actual savings depend on salary level chosen, state, and S-Corp compliance costs. S-Corp makes sense when savings exceed ~$3,000–5,000/year in compliance costs.
Pros & Cons
Sole Proprietorship
PROS
- ✓Zero setup cost
- ✓Zero ongoing compliance
- ✓Simplest taxes (Schedule C)
CONS
- ✗No liability protection
- ✗Full SE tax on all profit
- ✗Not scalable
LLC
PROS
- ✓Liability protection
- ✓Flexible management
- ✓Easy to upgrade to S-Corp
- ✓Professional credibility
CONS
- ✗Annual state fees
- ✗Same SE tax as sole prop (default)
- ✗Some state franchise taxes
S-Corp (LLC+S Election)
PROS
- ✓Major SE tax savings at higher incomes
- ✓Liability protection
- ✓Signals established business
CONS
- ✗Requires payroll processing
- ✗$500–2k/yr in compliance costs
- ✗More complex accounting
- ✗Only makes sense at $80k+ profit
Which Is Right for You?
Under $40k net profit: Sole Proprietorship
The simplicity wins. LLC and S-Corp compliance costs eat into any potential savings. Keep it simple until revenue grows.
$40k–$80k net profit: LLC (no S-Corp election)
Get the liability protection and credibility. S-Corp savings at this level ($2–4k) may not exceed the compliance costs. Reassess annually.
$80k+ net profit: Consider S-Corp election
The SE tax savings now clearly exceed compliance costs. Hire a payroll service ($50–100/mo) and a CPA. The ROI is typically very strong above $100k in net profit.