Single-Member LLC
Taxed as Sole Proprietorship (default)
S-Corporation
Salary + Distributions structure
Tax Breakdown Comparison
How This Works — Key Concepts
Why LLC = Sole Prop for Taxes
A single-member LLC is a "disregarded entity." The IRS ignores it — all income flows straight to your personal 1040 and gets hit with self-employment tax (15.3%) on top of income tax. The LLC only gives you legal liability protection, not tax savings.
The S-Corp Trick: Split the Income
With an S-Corp you pay yourself a W-2 salary — only that is subject to payroll taxes (FICA). The remaining profit comes to you as a distribution, which skips FICA entirely. That's the savings: distributions avoid the ~15.3% hit.
Self-Employment Tax Breakdown
12.4% Social Security (up to $168,600) + 2.9% Medicare = 15.3% total. As a sole prop you pay both halves. In an S-Corp your salary gets split: corporation pays 7.65%, you pay 7.65%. Distributions pay nothing.
QBI Deduction (Section 199A)
Pass-through businesses (sole props & S-Corps) get a 20% deduction on qualified business income. This reduces your taxable income — not your SE/payroll taxes. Phases out above $182k single / $364k MFJ for most service businesses.
The S-Corp Catch: Admin Costs
S-Corps require payroll processing (every pay period), a separate business tax return (Form 1120-S), and often extra accounting fees. Budget $1,500–$3,500/year in admin costs — these eat into your savings, especially at lower incomes.
The Reasonable Salary Rule
You can't pay yourself $1 to dodge payroll taxes. The IRS requires your W-2 salary be "reasonable compensation" for your industry and role. Audits have recovered back payroll taxes + penalties for owners with suspiciously low salaries.