What's the tax difference between an LLC and an S-Corp?

An LLC (by default) pays self-employment tax on all profit. An S-Corp splits profit into salary and distributions and avoids that tax on the distributions — but costs money to run.

Do LLCs pay self-employment tax?

Yes — a default single-member LLC pays self-employment tax on its profit, just like a sole proprietor, unless it elects S-Corp treatment.

Business structure

Does an LLC save you taxes?

Updated June 2026·2 min read·Checked against IRS Rev. Proc. 2025-32

It's the most common tax myth for new business owners: form an LLC and pay less tax. By default, an LLC changes your legal liability — not your tax bill. Here's what an LLC actually does, and the one move that does cut your tax.

Key takeaways

✓A single-member LLC is taxed exactly like a sole proprietor by default.
✓The tax saver is electing S-Corp status — which an LLC can do.
✓An LLC's real benefit is liability protection, not tax.

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What an LLC does by default

A single-member LLC is a "disregarded entity" for federal tax: the IRS ignores it and taxes you exactly as a sole proprietor. Same Schedule C, same 15.3% self-employment tax on your profit, same income tax. Forming one does not, by itself, lower your tax by a dollar.

Why people think it saves tax

The confusion comes from the S-Corp election. People hear that business owners save tax "with an LLC," but the saving comes from electing S-Corp treatment — which an LLC can do, but so can a corporation. The LLC is the wrapper; the election is the lever.

The S-Corp election is the real move

Electing S-Corp status (IRS Form 2553) lets you split your profit into a reasonable salary and distributions, and skip the 15.3% self-employment tax on the distribution portion. That's where the saving is — typically worth it past roughly $60,000–$80,000 of profit, once it clears the $1,200–$2,500 yearly cost of payroll and a separate return. The S-Corp calculator shows your number.

When an LLC is still worth it

Plenty of reasons that aren't about tax: it separates your personal assets from business liabilities, looks more professional to clients, and makes business banking cleaner. Just don't form one expecting a tax cut on its own — pair it with an S-Corp election when the numbers support it.

Frequently asked questions

Not by itself. A single-member LLC is taxed exactly like a sole proprietor. Tax savings come from electing S-Corp status, which an LLC can do once it's profitable enough to be worth it.

S-Corp vs sole proprietor calculator →Is an S-Corp worth it? →How much to set aside →

A planning estimate, not tax advice. Figures use IRS Rev. Proc. 2025-32 (2026). Confirm decisions with real money on the line with a CPA or enrolled agent.