LLC / Business Tax Estimator

The Self-Employment Tax Problem

When you work as an employee, your employer pays half of your Social Security and Medicare taxes — 7.65% of your wages. You pay the other 7.65%. Together, it adds up to 15.3%. But when you're self-employed, you pay both halves yourself: the full 15.3% on up to $168,600 of net earnings (2024), then 2.9% on everything above that. This is called self-employment (SE) tax, and it is applied before income tax — meaning it significantly raises your effective tax rate compared to being a W-2 employee at the same income level.

For a sole proprietor earning $100,000 in net profit, SE tax alone runs about $14,130 (after the 92.35% deduction). Add federal income tax on top and total federal taxes can easily exceed 35–40% of net profit. This is why entity structure matters so much for business owners.

Sole Prop vs LLC: What's Actually Different?

From a tax standpoint, a single-member LLC is treated identically to a sole proprietorship by default — both are "disregarded entities" under IRS rules. Your business income flows directly to Schedule C on your personal tax return, and you pay SE tax on 92.35% of net profit. The LLC does provide personal liability protection (your personal assets are shielded from business debts and lawsuits), but it does not reduce your tax burden without an additional election.

This is one of the most common misconceptions among new business owners: forming an LLC alone does not save taxes. To get a tax benefit, you need to elect S-Corp status.

How an S-Corp Election Reduces SE Tax

An S-Corp is not a separate business structure — it's a tax election (IRS Form 2553) that any LLC or corporation can make. Once elected, it splits your business income into two buckets:

1. Salary: You pay yourself a "reasonable salary" for the work you do in the business. This salary is subject to payroll taxes (Social Security and Medicare) — both the employee and employer halves.
2. Distributions: Remaining profit is paid to you as owner distributions. Distributions are NOT subject to self-employment tax or payroll taxes — only ordinary income tax.

The savings come from the distributions portion escaping payroll taxes. On $120,000 in net profit with a $60,000 salary and $60,000 in distributions, you save roughly $9,180 in payroll taxes (15.3% × $60,000) compared to taking everything as sole-prop income.

The catch: the IRS requires the salary to be "reasonable" — comparable to what you'd pay an employee to perform the same work. Setting an artificially low salary to maximize distributions is an audit red flag. A common guideline is 50–60% of net profit, though the right number depends on your industry and role.

When Does S-Corp Status Make Sense?

S-Corp election adds complexity: you'll need to run payroll, file quarterly payroll tax returns, and pay for more involved tax preparation. These costs typically run $2,000–$5,000 per year in accounting fees depending on your situation. That overhead must be offset by the SE tax savings.

The general breakeven is around $50,000–$80,000 in annual net profit. Below that threshold, the accounting costs outweigh the tax savings. Above $80,000, the S-Corp election typically pays for itself many times over. Use the estimator above to run your specific numbers.

The QBI Deduction (Section 199A)

The Qualified Business Income (QBI) deduction, established by the Tax Cuts and Jobs Act of 2017, allows eligible self-employed individuals and pass-through business owners to deduct up to 20% of qualified business income from taxable income. This deduction applies to sole props, partnerships, LLCs, and S-Corps — not C-Corps.

The deduction phases out at higher income levels ($182,050 single / $364,200 married in 2024) and is limited or eliminated for "specified service trades or businesses" — including law, health, financial services, and consulting. For eligible businesses below the phase-out threshold, it effectively lowers the federal income tax rate on business profit by about 20%, making it one of the most valuable deductions available to self-employed individuals.

Note that the QBI deduction is currently scheduled to expire after 2025 unless Congress acts to extend it.