LLC vs sole proprietorship

By Nicolas StrautPublished Aug 14, 20267 min read

Key takeaways

Self-employment tax is 15.3% on 92.35% of your net profit under both structures, up to the 2026 Social Security wage base of $184,500. Forming an LLC does not reduce it.
If you want the tax break people associate with an LLC, the thing that delivers it is the S-corporation election, which needs an LLC or a corporation to exist first. The LLC is the precondition, not the saving.
A sole proprietorship exists the moment you start working for yourself, with no filing and no fee. An LLC takes a state filing, a fee in every state, and an annual obligation in most.

In this article

What is the difference between an LLC and a sole proprietorship?
Does an LLC lower your taxes?
At what income is an LLC worth it?
What does an LLC actually protect you from?
Do you need an EIN for an LLC or a sole proprietorship?
How much does it cost to switch from a sole proprietorship to an LLC?
Frequently asked questions about LLCs and sole proprietorships
Related posts

The difference is liability, not tax. A single-member LLC is a disregarded entity, so you file the same Schedule C and owe the same self-employment tax as a sole proprietor, dollar for dollar.¹ What an LLC buys is a legal separation between business debts and personal assets, plus the option to elect S-corporation treatment later.

What is the difference between an LLC and a sole proprietorship?

	Sole proprietorship	Single-member LLC
How it forms	Automatically, when you start doing business	State filing, $35 to $500
Cost to start	$0	Filing fee, plus recurring fee in most states
Personal liability	You are personally liable for business debts	Limited by state statute
Federal income tax	Schedule C with Form 1040	Schedule C with Form 1040, identical
Self-employment tax	15.3% on 92.35% of net profit	15.3% on 92.35% of net profit, identical
Tax return	No separate return	No separate return
EIN required	Only with employees or an excise, retirement-plan or ATF obligation	Same triggers, but the EIN sits in the LLC's name
Can elect S-corp	No	Yes, via Form 2553

Read down the two tax rows and the comparison mostly evaporates. Everything an LLC changes sits in the top half of that table, in how the business is formed and who's on the hook for its debts, not in what you send the IRS in April.

Does an LLC lower your taxes?

An LLC doesn't lower your taxes on its own. The IRS treats "an LLC with only one member... as an entity disregarded as separate from its owner, unless it files Form 8832 and affirmatively elects to be treated as a corporation." Disregarded means what it sounds like: for income tax, the entity isn't there.

The same page settles self-employment tax, stating that an individual owner of a single-member LLC running a trade or business owes it "in the same manner as a sole proprietorship." So both halves of a freelancer's federal tax bill land in exactly the same place under either structure.²

How much self-employment tax you owe under each structure

Net profit	Net earnings (× 92.35%)	Sole proprietor SE tax	Single-member LLC SE tax
$50,000	$46,175.00	$7,064.78	$7,064.78
$75,000	$69,262.50	$10,597.16	$10,597.16
$100,000	$92,350.00	$14,129.55	$14,129.55
$150,000	$138,525.00	$21,194.32	$21,194.32
$200,000	$184,700.00	$28,234.30	$28,234.30

Assumes a single filer, no W-2 wages, no S-corporation election, 2026 figures.³ The $200,000 row is the first where the wage base bites: net earnings of $184,700 clear the $184,500 cap by $200, so the Social Security portion stops there and only the 2.9% Medicare piece keeps running above it.⁴

Why the two columns are the same

There's one computation, not two. Because the LLC is disregarded, your income runs through a single Schedule C and a single Schedule SE whether or not you ever filed anything with your state, so there's no separate LLC number to compare against. If you want the mechanics behind that 15.3%, what is self-employment tax breaks it down, and the self-employment tax calculator runs your own figure.

See exactly how your Social Security and Medicare tax is calculated, and what to set aside for your next quarterly payment.

Tax year

Filing status

W-2 wages (if any)

Reduces how much SE income is still subject to Social Security

Net self-employment income

Net profit from Schedule C, line 31. A net loss is fine. Enter it as a negative number.

Prior year total tax liability

Enables an accurate safe-harbor quarterly split

How much self-employment tax will I pay?

A quick reference for single filers with no W-2 income, at three common income levels, using 2026 numbers.

Net SE income	Total SE tax
$50,000	$7,064.78
$80,000	$11,303.64
$120,000	$16,955.46

How this is calculated

Net self-employment income is multiplied by 92.35% to get net earnings from self-employment. Social Security tax is 12.4% of that figure, up to the year's wage base (any W-2 wages reduce the remaining room under that cap). Medicare tax is 2.9% of the full amount, uncapped. An Additional Medicare Tax of 0.9% applies only once your combined earned income passes your filing status's threshold.

The quarterly payment estimate above also factors in income tax: (net income − half of SE tax − standard deduction − 20% QBI deduction) run through the current year's brackets. That QBI deduction is a flat 20% simplification — it doesn't model the §199A phase-out or specified-service-trade limits at higher incomes. For the full current-year vs. safe-harbor comparison, use the Solvent Quarterly Tax Estimator.

A net loss (net self-employment income entered as a negative number), $0 net income, and net earnings under the $400 Schedule SE filing threshold all correctly zero out self-employment tax. None of these reduce the income tax owed on any W-2 or other income the way a real return would: the quarterly payment estimate above only appears once net income is positive and above that threshold, so that offset isn't modeled here.

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This is an estimate, not tax advice. It covers federal self-employment tax only. State income tax is not calculated.

Your inputs stay in your browser. This is an estimate, not tax advice.

At what income is an LLC worth it?

On tax grounds alone, there isn't one. The LLC never touches the computation, so there's no income level where it quietly starts paying for itself. The reasons that do decide it are non-tax ones, and do freelancers need an LLC works through them for a one-person business.

The threshold people are actually reaching for belongs to the S-corporation election, which an LLC makes available. The IRS describes the mechanism when it discusses reclassifying "non-wage distributions (which are not subject to employment taxes) to wages (which are subject to employment taxes)," and requires that S corporations "pay reasonable compensation to a shareholder-employee... before non-wage distributions may be made."⁵ That's where the payroll-tax saving lives, and it's a genuinely different decision with its own arithmetic. S corp vs LLC covers it.

What does an LLC actually protect you from?

Not taxes, and not the IRS. The IRS's only word on the subject is that "a Limited Liability Company (LLC) is a business structure allowed by state statute," which is a polite way of saying the protection isn't federal and isn't its department.

What your state's LLC act gives you is a wall between business creditors and personal assets, so a supplier chasing an unpaid invoice is generally chasing the company. The wall has doors, though. A lender will often want a personal guarantee from a one-person business, and signing one puts your own assets back on the table for that debt, which is the most common way the separation stops mattering in practice.

Do you need an EIN for an LLC or a sole proprietorship?

The triggers are identical, which is not what most comparisons imply. With no employees, no retirement plan, and no excise obligation, neither structure requires an EIN and you can file under your Social Security number.

The difference appears once you hire. From that point an LLC must obtain and use an EIN issued in the LLC's own legal name, because the disregarded-entity rule doesn't extend to employment taxes. How to get an EIN covers the application.

How much does it cost to switch from a sole proprietorship to an LLC?

Between $35 and $500 in state filing fees, depending where you register, plus a recurring fee in most states. How much does an LLC cost has the state-by-state table.

What doesn't change is worth as much as what does. You keep filing Schedule C, your reserve percentage is unaffected, and your estimated payments still start at the same $1,000 threshold. How much to set aside for taxes applies before and after identically.

Frequently asked questions about LLCs and sole proprietorships

Is it better to be an LLC or sole proprietor?

Which is better comes down to liability exposure rather than the tax bill, since a single owner is taxed the same either way. An LLC earns its cost once you have real assets to protect, contracts to sign, or a reason to keep the S-corporation election open. Below that, a sole proprietorship does the same job for nothing.

What is the biggest disadvantage of an LLC?

The biggest disadvantage is paying and administering something you may not need yet. Most states charge annually or biennially, several add a franchise tax on top, and you inherit filing deadlines a sole proprietor never thinks about. None of that buys you a lower tax bill.

What is a 1 person LLC called?

A one-person LLC is called a single-member LLC. The IRS treats it as a disregarded entity by default, meaning it isn't separate from its owner for income tax purposes, so the income lands on the owner's Schedule C exactly as a sole proprietorship's would.

Can I change from a sole proprietorship to an LLC later?

You can change later, and most freelancers do it in exactly that order, forming the LLC once liability exposure justifies the cost. Your federal filing doesn't change at all unless you also elect S-corporation treatment. There's no tax penalty for having waited.

Is a single-member LLC the same as a sole proprietorship for taxes?

A single-member LLC is treated the same as a sole proprietorship for federal income tax and self-employment tax, because it is a disregarded entity. The two part company only for employment and certain excise taxes, where the LLC is treated as a separate entity filing in its own name.

About the author

Nicolas Straut

Personal and business finance writer, former Forbes contributor

Nicolas Straut writes about self-employment and quarterly tax, LLC formation and costs, and tax software for Solvent. He has spent eight years writing about money and building content for fintech companies.