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Sole Proprietor vs LLC Taxes: Why They're Identical (Until They're Not)

The most common misconception about LLCs: that they have better tax treatment. They don't, by default. Here's the full story with 2026 numbers.

"A single-member LLC pays exactly the same taxes as a sole proprietorship. The IRS treats them identically."

Both file Schedule C. Both pay 15.3% SE tax. There is zero difference by default.

How Sole Proprietor Taxes Work

Example: You earn $75,000 in net profit as a freelance designer.

Net profit (Schedule C)$75,000
SE tax base (92.35% of $75k)$69,263
SE tax (15.3%)$10,597
Deduct half of SE tax from income-$5,299
Adjusted gross income$69,701
Income tax (22% bracket, simplified)~$8,048

How Single-Member LLC Taxes Work

Same example: You earn $75,000 in net profit through your single-member LLC.

Net profit (Schedule C - same form)$75,000
SE tax base (92.35% of $75k)$69,263
SE tax (15.3%) - IDENTICAL$10,597
Income tax - IDENTICAL~$8,048
Total federal tax: identical to sole proprietorship. The LLC label changes nothing.

Federal Tax Comparison: Sole Prop vs LLC (Default) - 2026

Single filer, standard deduction. Both columns are identical because the IRS treats them the same.

Net ProfitSE TaxEst. Income TaxTotal FederalEffective Rate
$30,000$4,239$1,298$5,53718.5%
$50,000$7,065$3,798$10,86321.7%
$75,000$10,598$8,048$18,64624.9%
$100,000$14,130$12,298$26,42826.4%
$150,000$21,195$23,548$44,74329.8%
$200,000$25,737$36,048$61,78530.9%

Estimates. Does not include state income tax. Income tax estimate uses 2026 brackets with standard deduction. SE tax uses 2026 wage base of $184,500.

When Taxes DO Change: The S-Corp Election

An LLC can elect to be taxed as an S-Corp. This creates a different tax structure: you pay yourself a "reasonable salary" as an employee and take the rest as distributions. The key insight: you only pay SE tax on the salary portion, not on distributions.

Example at $100,000 net profit:
Sole Prop / LLC Default
SE tax: $14,130
(15.3% on $92,350)
LLC + S-Corp ($60k salary)
SE tax: $8,478
Saving: $5,652 in SE tax
Compliance cost: ~$2,000/yr
Net benefit: ~$3,652

S-Corp Breakeven Analysis by Income Level (2026)

Assumes ~65-70% salary ratio as reasonable salary. Compliance cost estimate: $2,000-$2,500/year (payroll service + tax return preparation).

Net ProfitSalarySE SavedCompliance CostNet Benefit
$40,000$30,000+$1,413-$2,000-587
$60,000$42,000+$2,543-$2,000+543
$80,000$52,000+$3,957-$2,000+1,957
$100,000$60,000+$5,652-$2,000+3,652
$150,000$85,000+$9,185-$2,500+6,685

The crossover point is typically $55,000-$65,000 in net profit. Below this, S-Corp status costs more than it saves.

Available Deductions: Identical for Both Structures

The LLC does not unlock any new deductions. Every deduction available to an LLC is equally available to a sole proprietor.

Home office
Dedicated space, proportional expenses
Vehicle
58.5 cents/mile or actual expenses
Health insurance
Self-employed premium deduction
SEP-IRA
Up to 25% of net profit, max $69,000
Solo 401(k)
$23,500 employee + 25% employer 2026
Half of SE tax
Deducted from gross income
Business insurance
Premiums fully deductible
Professional development
Courses, books, conferences
Software and tools
Business use percentage
Business travel
Flights, hotels, 50% of meals

State Tax Considerations

Some states have LLC-specific taxes that sole proprietors do not pay. The most significant:

California: Minimum $800/year franchise tax

Due even if you have zero revenue. Must be paid within 3.5 months of forming the LLC. The biggest gotcha for California LLCs.

New York: Filing fee plus LLC tax

Multi-member LLCs pay a tax based on income. Plus the notorious publication requirement ($1,000-$2,000 in NYC counties).

Tennessee: Excise and franchise tax

Excise tax of 6.5% on net earnings plus franchise tax of 0.25% on net worth.

Illinois: LLC franchise tax

Based on the value of LLC property located in Illinois.

Most other states: Annual report fee only

Typically $0-$300/year. No additional income or franchise tax on the LLC itself.

See full state-by-state cost breakdown (all 50 states)

Frequently Asked Questions

Does an LLC pay less taxes than a sole proprietorship?
No, not by default. A single-member LLC is taxed identically to a sole proprietorship. The IRS treats it as a disregarded entity. Both file Schedule C and pay the same 15.3% self-employment tax on net profit. Tax savings only happen if you elect S-Corp status, which only makes financial sense above approximately $40,000 in annual net profit.
What is the self-employment tax rate in 2026?
The 2026 self-employment tax rate is 15.3%: 12.4% for Social Security (on net earnings up to $184,500) plus 2.9% for Medicare (on all net earnings). An additional 0.9% Medicare surtax applies to net SE income above $200,000 (single filers) or $250,000 (married filing jointly). You pay SE tax on 92.35% of net profit - not 100% - because of the self-employment tax deduction.
At what income level does S-Corp status make sense?
The S-Corp breakeven point is generally $40,000-$60,000 in annual net profit. Below that, the compliance costs - payroll service ($500-$2,000/year), separate business tax return ($500-$1,500/year to prepare), quarterly payroll filings - exceed the tax savings. Above $60,000 net profit, the savings typically outweigh the costs. At $100,000 net profit with a $60,000 salary, you save roughly $4,590 in SE tax.
Does an LLC give you more tax deductions?
No. A single-member LLC does not unlock any new tax deductions compared to a sole proprietorship. Both can deduct home office, vehicle, health insurance, retirement contributions, professional development, and other business expenses. The deduction landscape is identical because both file Schedule C and the IRS treats them the same way for tax purposes.
What is a disregarded entity?
A disregarded entity is an LLC that the IRS ignores for tax purposes. It does not file a separate tax return. Instead, all income and expenses flow through to the owner's personal return on Schedule C - exactly as they would for a sole proprietor. The LLC still exists as a legal entity for liability purposes, but the IRS pretends it doesn't exist for taxes.
Related Guides
SE Tax CalculatorSole Prop vs LLC vs S-CorpLLC Cost by StateSole Proprietor vs LLC Overview