Sole Proprietor vs LLC Taxes: A Freelancer's Worked Example

TL;DR: For federal income tax, a single-member LLC and a sole proprietorship are the same thing. Both report on Schedule C, and both pay 15.3% self-employment tax on 92.35% of net profit. Forming an LLC changes your legal liability, not your tax bill. The tax math only moves when you elect S-corporation treatment and split profit into a reasonable salary plus distributions, and that election carries costs that eat into the saving. On $120,000 of profit, an S-corp election saves roughly $6,245 in Social Security and Medicare tax before those costs.

Most of the search results for this question explain the legal difference between the two structures and stop there. The tax question has a specific, checkable answer, so this guide runs one freelancer's numbers through each option. Keeping your net profit accurate in the first place, with an expense tracker that captures every deductible cost, is what shrinks the figure all of these taxes are calculated on.

Is There a Tax Difference Between a Sole Proprietor and an LLC?

By default, no. The IRS does not tax "LLCs" at all. An LLC is a structure created under state law, and as the IRS explains, "the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC's owner's tax return."

For a business with one owner, that last option is the default. A single-member LLC "is treated as an entity disregarded as separate from its owner" for income tax. The IRS says it plainly: the owner reports the business on Schedule C, and "the owner pays self-employment taxes just as a sole proprietor would." Same form, same tax, same result.

So the honest answer to "will an LLC lower my taxes?" is that the LLC by itself does nothing to your federal tax. What an LLC buys you is limited liability, a legal separation between your business debts and your personal assets. That can be worth the filing fee on its own. It is just not a tax move.

Two later choices do change the tax:

• Electing corporate treatment. A single-member LLC can file Form 8832 to be taxed as a corporation, or Form 2553 to be taxed as an S corporation. The S election is the one people mean when they say "an LLC saves on taxes."
• Adding owners. A multi-member LLC defaults to a partnership, which files Form 1065 and passes profit to the partners, who generally still owe self-employment tax on their share.

The rest of this guide follows the single-owner path, because that is where the sole-proprietor-versus-LLC question lives.

Where Self-Employment Tax Comes From

Self-employment tax is the piece an LLC does not touch by default, so it is worth seeing the mechanics before the worked example.

The rate is 15.3%, which the IRS breaks into "12.4% for social security" and "2.9% for Medicare." You do not apply it to your whole profit. Per IRS Topic 554, "the amount subject to self-employment tax is 92.35% of your net earnings from self-employment," and you then "deduct one-half of the self-employment tax" when figuring adjusted gross income.

The 12.4% Social Security slice stops at a ceiling. For 2026 the Social Security wage base is $184,500, up from $176,100 in 2025. Earnings above that ceiling still owe the 2.9% Medicare portion but not the Social Security portion. The freelancer below earns under the ceiling, so the full 15.3% applies.

One Freelancer's $120,000, Three Ways

Dana runs a solo consulting business, files as a single taxpayer, has no employees, and nets $120,000 in profit for 2026. That profit is identical whether she operates as a sole proprietor, a single-member LLC, or an LLC that elected S-corp status. What changes is how much of it the Social Security and Medicare tax can reach.

The first two columns are the same numbers because they are the same tax treatment. Dana's LLC files nothing extra; the profit lands on her Schedule C, and Schedule SE takes 92.35% of $120,000 ($110,820) times 15.3%, which is $16,955.

The third column is the only one that moves, and here is why. As an S corporation, Dana becomes an employee of her own business. She pays herself a $70,000 salary, and Social Security and Medicare tax applies to that wage: 15.3% of $70,000 is $10,710, split as an employee half and an employer half. The remaining profit, about $44,600 after the deductible employer payroll tax, passes to her as a distribution, and distributions are not subject to Social Security or Medicare tax. The tax that reached all $110,820 as a sole proprietor now reaches only the $70,000 salary.

The gap is $16,955 minus $10,710, or $6,245. That is the entire tax case for the S-corp election. Note what did not change: federal income tax is close across all three, because every dollar of profit is still taxable income to Dana either way. The lever is payroll tax, not income tax.

Where the S-Corp Election Saves, and What It Costs

A $6,245 headline saving is real, but it is a gross figure. Running an S corporation adds fixed costs that a sole proprietor does not pay:

• Payroll. Dana now has to run real payroll, withhold taxes, and file quarterly payroll returns, usually through a paid service.
• A second tax return. The S corporation files its own return, Form 1120-S, on top of her personal 1040. Most accountants charge more for the pair.
• State fees. Several states levy an annual LLC fee or franchise tax that is owed regardless of profit, and a few reach into the hundreds of dollars. Check your state's tax agency before assuming the federal saving is the whole picture.
• A salary the IRS will test. The salary has to be reasonable. The IRS is explicit that distributions are not a way around wages: courts have "found shareholder-employees are subject to employment taxes even when shareholders take distributions, dividends or other forms of compensation instead of wages." Set the salary too low to inflate the tax-free distribution and the IRS can reclassify it, with back taxes and penalties.
• A smaller QBI deduction. The wages you pay yourself are not qualified business income, so a lower salary that saves payroll tax also trims your Section 199A deduction. The two effects work against each other.

Add those up and the election only pays for itself once profit is high enough that the payroll-tax saving clears the payroll service, the extra return, and any state fee. Below that point, the sole proprietorship or default LLC keeps more money and far less paperwork. The exact break-even is a per-business calculation, not a universal number, which is why "form an LLC and elect S-corp" is bad blanket advice.

Sole Proprietor vs LLC vs S-Corp: Side by Side

Which Structure Fits Your Situation

Three questions settle it for most one-owner businesses.

Do you need liability protection? If a client or customer could plausibly sue, or you carry business debt, the LLC's legal shield is the reason to form one. Decide this on legal grounds first, because it is true whether or not you ever change your tax election.

Is your profit high and steady? The S-corp saving scales with the profit that sits above a reasonable salary. At $120,000 the gross saving was $6,245; at $60,000, after paying yourself a reasonable salary, there is little profit left to shield and the payroll and filing costs can swallow the benefit. Reserve the election for profit that clears those costs with room to spare.

Do you want the admin? A sole proprietor tracks income and expenses and files one Schedule C. An S corporation runs payroll, files a corporate return, and defends a salary figure. Some owners happily trade the paperwork for the saving; others would rather keep the hour back.

Whatever you choose, the tax is calculated on net profit, and net profit is gross income minus every legitimate expense you can document. Miss deductions and you overpay under all three structures. Categorizing costs the way Schedule C expects, and keeping an income tracker that shows profit in real time, is the groundwork the entity choice sits on top of. Our Schedule C walkthrough covers the reporting itself, and the self-employment tax calculator runs your own numbers through the 92.35% math above.

Common Misconceptions About LLC Taxes

"An LLC lowers my taxes." Not by itself. A single-member LLC is a disregarded entity taxed identically to a sole proprietorship. The tax only changes if you additionally elect S-corp status, which is a separate filing with separate costs.

"S-corp distributions are free money." Only the portion above a reasonable salary escapes payroll tax, and the salary has to be reasonable for the work performed. The IRS reclassifies underpaid salaries, and the distribution is still ordinary income for income-tax purposes either way.

"I have to pick the perfect structure before I start." You do not. Many businesses start as a sole proprietorship, add an LLC when liability matters, and elect S-corp status only once profit justifies the overhead. The self-employment tax works the same at every step; you are just deciding when the extra machinery earns its keep.

Key Takeaways

• For federal income tax, a single-member LLC and a sole proprietorship are the same: Schedule C, and 15.3% self-employment tax on 92.35% of net profit. On Dana's $120,000, that is $16,955 for both.
• An LLC's benefit is limited liability, a legal protection, not a tax cut. Choose it on legal grounds first.
• The tax only changes with an S-corp election, which splits profit into a reasonable salary (taxed) and distributions (not subject to Social Security or Medicare tax). On $120,000 with a $70,000 salary, that saved about $6,245 in payroll tax.
• That saving is gross. Payroll, a second tax return, state fees, and a smaller QBI deduction all eat into it, so the election pays off only above a profit level that clears those costs.
• Every structure taxes net profit, so the move that pays off at any stage is documenting every deductible expense to keep that profit figure accurate.