LLC vs Sole Proprietorship Taxes:
The Honest Breakdown (2026)
A single-member LLC is taxed identically to a sole proprietorship by default. If someone tells you an LLC saves you taxes without mentioning S-Corp election, they are wrong.
The most important thing to understand
The IRS calls a single-member LLC a "disregarded entity." For tax purposes, it ignores the LLC entirely. You still file Schedule C, still pay 15.3% self-employment tax on all net profit, still use your personal tax return. The LLC wrapper changes nothing about how you are taxed -- unless you take the extra step of electing S-Corp status.
What "Pass-Through" Taxation Means
Sole Proprietorship
- 1. Business earns income
- 2. Profit passes directly to your Form 1040
- 3. You report on Schedule C
- 4. You pay SE tax + federal income tax
Single-Member LLC (Default)
- 1. Business earns income
- 2. LLC is "disregarded" -- IRS ignores it
- 3. You report on Schedule C (same as sole prop)
- 4. You pay SE tax + federal income tax (same as sole prop)
Both structures file Schedule C, pay the same SE tax, get the same QBI deduction, and pay the same federal income tax. There is no default tax difference.
Self-Employment Tax: The Big Number
SE tax is 15.3% of 92.35% of your net business income. It covers Social Security (12.4%, capped at $168,600 in 2026) and Medicare (2.9%, uncapped). The half-of-SE-tax deduction reduces your income tax -- but you still pay the full SE tax.
| Net Income | SE Tax | Half-SE Deduction | QBI Deduction (~20%) | Note |
|---|---|---|---|---|
| $40,000 | $5,652 | $2,826 | $7,435 | Below S-Corp threshold |
| $75,000 | $10,598 | $5,299 | $13,940 | Near S-Corp break-even |
| $100,000 | $14,130 | $7,065 | $18,587 | S-Corp starts making sense |
| $150,000 | $19,645 | $9,823 | $28,035 | Clear S-Corp benefit |
SE tax: 15.3% x 92.35% of net income (up to SS wage base). QBI is 20% of (net income - half-SE deduction). 2026 rates. Not tax advice.
State Taxes: The One Area LLCs Cost More
Some states charge LLCs additional taxes that sole proprietors avoid. This is a real cost difference.
California
$800/year franchise tax minimumApplies even if you made no profit. Sole props pay state income tax but not this fee. The LLC costs you $800 more per year from day one.
Texas
Franchise tax on gross receipts over $2.47MThreshold is high enough that most small businesses are exempt. But LLCs must file regardless. Sole props are exempt from the franchise tax entirely.
Delaware
$300/year franchise taxDelaware LLCs pay $300/year to maintain their registration. Sole props in Delaware have no equivalent charge.
Tennessee
Franchise and excise taxTennessee charges a franchise tax (0.25% of net worth) and excise tax (6.5% of net income) on LLCs. Sole proprietors pay only state income tax.
Outside these states, sole proprietors and single-member LLC owners pay the same state income tax. Check the full 50-state fee table for your state.
The S-Corp Election: The One Real Tax Difference
An LLC (but not a sole proprietorship) can file IRS Form 2553 to be taxed as an S-Corporation. This lets you pay yourself a reasonable salary via W-2 and take the rest as distributions. SE tax only applies to the salary portion.
Example at $100,000 Net Income
Sole Prop / LLC Default
LLC + S-Corp Election
Net saving: ~$1,715/year at $100k income (after $4k compliance cost)
Deductions: Same for Both
Both structures get the same business deductions.