Business Entity Tax Comparison
Compare US business tax across Sole Prop, LLC, S-Corp, and C-Corp at your specific profit + salary mix. SE tax savings + QBI deduction included. Free.
Business Entity Tax Comparison
⚠ Disclaimer: Estimates for planning purposes only. Industry benchmarks drift over time and your specific circumstances may differ materially. Verify against your own data and consult an accountant or business adviser for material decisions.
Compares total US federal tax across four entity structures at your specific profit level: Sole Proprietorship, Single-Member LLC, S-Corporation, C-Corporation. Includes SE tax, employer FICA, QBI deduction (20% for pass-throughs), and C-Corp double-taxation.
How to Use the Entity Tax Comparison
Use realistic profit
Profit = revenue minus all business expenses (NOT including owner's salary). For sole prop, this is the Schedule C line 31 figure. Use trailing 12 months or projected next-12-months — whichever is more realistic for the decision.
Pick a realistic S-Corp salary
The IRS requires "reasonable compensation" — what you would pay an arm's-length employee to do your job, judged on the facts (IRS, S corporation compensation guidance). Bureau of Labor Statistics occupational wage data and commercial salary guides are the usual comparables. Too low: audit risk and reclassification of distributions as wages. Practitioners often start from a rule of thumb of 30–50% of profit for service businesses, but the standard is the comparables, so document them.
Compare tax savings vs setup cost
S-Corp election adds a payroll service, additional accounting and a separate Form 1120-S return. Price those for your own business; if the SE-tax saving the tool shows is only a few thousand dollars, the overhead can eat it.
Consult a small-business CPA before electing
S-Corp election (Form 2553) and entity choice are not casual decisions. State taxation, ownership rules, liability protection, and future capital-raising needs all matter. Use the calculator to size the federal tax picture; consult a CPA for the full multi-year strategy.
Entity Choice — The Single Most Impactful US Small Business Tax Decision
The Four Structures + Their Tax Treatment
Sole Proprietorship: simplest, default for unincorporated single-owner businesses. Profit flows to Schedule C of personal return. Subject to 15.3% self-employment tax + ordinary income tax. Owner is personally liable for business debts. Single-Member LLC: federally taxed identically to sole prop UNLESS you elect S-Corp treatment. Provides legal liability protection — business creditors can't pursue personal assets. Same tax forms, different liability. S-Corporation: pass-through entity (no corporate tax) but owner must take a "reasonable salary" subject to FICA. Distributions beyond salary avoid the 15.3% SE tax — the main tax saving. Files Form 1120-S; owner gets K-1. C-Corporation: pays 21% corporate tax on all profit; distributions to owner taxed again at qualified-dividend rate (15-20%). Double taxation. Useful for businesses retaining earnings or planning future capital raises.
For owner-operated US small businesses, the typical path is: start as a sole prop / single-member LLC → grow profitable → elect S-Corp once the SE-tax saving on distributions above a reasonable salary clearly exceeds the payroll and accounting overhead (the comparison above shows the saving at your profit) → convert to C-Corp only if planning an institutional fundraise or retaining earnings significantly. C-Corp is rarely optimal for owner-operated SMBs because of double taxation.
The QBI Deduction — Pass-Through Advantage
The Qualified Business Income (QBI) deduction (IRC §199A, introduced by the 2017 TCJA) lets pass-through owners deduct up to 20% of QBI from federal taxable income. It was scheduled to sunset after 2025, but the One Big Beautiful Bill Act (OBBBA, signed July 2025) made the 20% §199A deduction permanent — no expiration. Applies to sole prop, LLC, S-Corp partners/shareholders. NOT applicable to C-Corp. Phase-in/out limits (2026, per IRS Rev. Proc. 2025-32): above USD 201,750 single / USD 403,500 joint taxable income, the deduction phases out for "specified service" trades (law, accounting, consulting, health, performing arts) — by USD 276,750 single / USD 553,500 joint, fully phased out (OBBBA widened the phase-in range to USD 75K single / USD 150K joint from 2026). For non-SSTB businesses (manufacturing, retail, real estate, most trades), the deduction continues above the thresholds with limitations based on W-2 wages paid + qualified property.
The QBI deduction is a structural advantage for pass-throughs vs C-Corp. A USD 100K sole-prop profit gets a ~USD 20K QBI deduction, reducing federal taxable income to ~USD 80K. The same profit through C-Corp gets no equivalent deduction. This is a major reason S-Corp typically beats C-Corp for owner-operated SMBs.
"Reasonable-compensation risk is real for S-Corps. The IRS standard is what an arm's-length employee would earn doing your job, judged on the facts and circumstances — and the IRS can recharacterise distributions as wages and collect the payroll tax with penalties."
State Tax Considerations
Federal tax is only half the story. California: imposes USD 800 annual minimum franchise tax on ALL entities (LLCs, S-Corps, C-Corps). Texas: franchise tax of 0.75% of taxable margin (0.375% for retailers and wholesalers) only above a no-tax-due threshold of USD 2.65 million of revenue for 2026–27 reports (Texas Comptroller), so most small businesses owe nothing. New York: separate state income tax + city tax for NYC entities. Delaware: cheap incorporation but you still pay tax where you operate. The state-by-state landscape can materially change the entity comparison — California's USD 800 minimum + 1.5% S-Corp tax on profit makes S-Corp election less compelling for small CA businesses than for the same business in Texas or Florida. Always factor state tax into the entity comparison.
Fifteen point three percent is the number an S-Corp election is about
Sole prop + LLC (single-member, default): all profit on Schedule C, 15.3% SE tax + ordinary income tax.
S-Corp: salary subject to FICA + distribution NOT subject to SE tax. The structural tax savings on profit above reasonable salary.
C-Corp: 21% corporate rate, then 15–20% qualified-dividend tax on what is left = about 33–37% combined on distributed profit.
QBI deduction (§199A): up to 20% of qualified business income for pass-throughs. NOT available to C-Corp.
S-Corp requires reasonable salary for owner-employees. IRS audits aggressively when salary seems unreasonably low.
S-Corp election: file Form 2553 within 2 months and 15 days of the start of the tax year it is to apply to — 15 March for a calendar-year business (IRS Form 2553 instructions).
S-Corp overhead is real: payroll service, extra accounting and a Form 1120-S return every year — price them before electing.
The S-Corp saving is the self-employment tax avoided on distributions above a reasonable salary — 15.3% below the USD 184,500 wage base, 2.9% above it (2026).
C-Corp 2017 TCJA permanent flat 21% corporate rate (down from graduated 15-35%).
LLC provides liability protection regardless of tax election. Members can be sole prop, S-Corp, or partnership taxed.
Frequently Asked Questions
- Once the SE-tax saving the comparison shows clearly exceeds the payroll, accounting and filing overhead, year after year. The saving is 15.3% of the profit you can defensibly take as distribution rather than salary (2.9% on amounts above the wage base), so it grows with profit and shrinks as the reasonable salary rises. Form 2553 must be filed within 2 months and 15 days of the start of the tax year (15 March for a calendar year); late elections can be approved with reasonable cause.
- IRS rule: what you'd pay an arm's-length employee to do your job, judged on the facts — training, duties, hours, what comparable businesses pay. Use BLS occupational wage data and commercial salary guides to benchmark your role and market. A salary that is small relative to distributions invites audit and reclassification (the IRS converts distributions back to wages and collects the payroll tax with penalties). Document your reasoning and keep the comparables.
- Different questions. LLC is a STATE-level entity providing liability protection. S-Corp is a FEDERAL tax election. You can have an LLC taxed as Sole Prop (default for single-member) OR as S-Corp. A common setup is an LLC for liability protection with an S-Corp election added once the SE-tax saving the comparison shows clearly exceeds the payroll, accounting and filing overhead. The phrase "LLC vs S-Corp" is somewhat misleading — they're not mutually exclusive.
- Rare for owner-operated SMBs. Double taxation (21% corporate + 15-20% dividend) usually exceeds pass-through total tax. C-Corp is appropriate for: (a) plans to raise venture capital (VCs typically only invest in Delaware C-Corps); (b) plans to take public; (c) reinvesting all profits in growth (retained earnings — no dividend, no second tax level); (d) sophisticated multi-state operations. For pure owner-operated SMBs taking profit out, S-Corp or pass-through wins.
- Qualified Business Income deduction (IRC §199A, post-TCJA 2018): pass-through owners deduct up to 20% of QBI from federal taxable income. Applies to: sole prop, LLC, S-Corp, partnership owners. Does NOT apply to: C-Corp shareholders. Phase-outs for "specified service" trades (law, accounting, consulting, health, performing arts) above income thresholds. For most non-service businesses, the deduction is structural advantage over C-Corp at all profit levels.
- Yes, with rules. Sole Prop → LLC: simple, file Articles of Organization. LLC → S-Corp: file Form 2553. S-Corp → LLC (Sole Prop): can revoke election. Sole Prop → C-Corp: incorporate + transfer assets (Section 351 tax-free). C-Corp → S-Corp: file Form 2553 (must wait 5 years after revocation to re-elect). Each switch has tax + accounting implications — consult a small-business CPA before making the change.
- Usually your home state. The "Delaware advantage" mostly applies to C-Corps raising venture capital. For owner-operated SMBs, incorporating outside your home state typically means: incorporating in Delaware + ALSO registering as foreign entity in your home state = double the filing fees + complexity. Stick with your home state unless you have specific reason (VC plans, multi-state operations, asset-protection strategy with CPA + attorney guidance).
- Multi-owner equivalent of single-owner sole prop / LLC. Files Form 1065; each partner gets K-1. Subject to SE tax on partner's distributive share. Multi-member LLCs default to partnership taxation. Most modern multi-owner SMBs use Multi-Member LLC + S-Corp election rather than general partnership (better liability protection, similar tax treatment, more familiar to lenders + buyers).
- California adds: USD 800/year minimum franchise tax (LLC, S-Corp, C-Corp). An LLC also pays a tiered fee on California income — USD 900 from USD 250,000 up to USD 11,790 at USD 5 million or more (FTB). An S-Corp pays 1.5% state tax on net income (with the USD 800 minimum). Together, a California sole prop with low overhead can beat a California S-Corp until profit is well into six figures — run the state numbers alongside the federal comparison above. The federal SE tax savings of S-Corp partially eaten by CA franchise + S-Corp tax. Run the math state-specifically.
- A single-member LLC by default — federal tax treats it as "disregarded" — i.e. tax-transparent. The LLC's profits flow to the owner's Schedule C just like a sole proprietorship. The LLC exists at the state level for liability protection but doesn't file a separate federal tax return. Most US small businesses operate as disregarded-entity LLCs (LLC for liability + sole prop tax) until they reach the profit level where S-Corp election makes sense.
Method & sources
How it computes
Sole prop / single-member LLC: SE tax = 12.4% OASDI (to the wage base) + 2.9% Medicare (uncapped) on net SE earnings (92.35% of profit), half deducted; QBI = 20% × (profit − ½ SE tax); income tax = marginal rate × (profit − ½ SE tax − QBI). S-Corp: FICA on the salary (both sides), QBI on the distribution, income tax on salary + distribution − QBI − employer FICA. C-Corp: 21% on profit after salary, 15% qualified-dividend tax on the remainder, FICA and income tax on salary.
What this tool implements
- Tax year 2026: OASDI wage base USD 184,500 (SSA); SE tax 12.4% + 2.9% on 92.35% of profit (IRC §1401, §1402(a)(12)); Additional Medicare Tax (0.9%) not modelled
- §199A deduction taken at a flat 20% — the USD 201,750 / 403,500 thresholds, SSTB phase-out and W-2/property limits are not modelled; deduction permanent under Pub. L. 119-21 (2025)
- C-Corp: 21% flat rate (IRC §11); qualified dividends at 15% regardless of income; state taxes excluded
- A single marginal federal rate you enter applies to all taxable income (no bracket walk); S-Corp payroll FICA is 6.2% OASDI (capped at the wage base) + 1.45% Medicare on each of employer and employee
What can make this go out of date
- Social Security wage base — SSA announces each October for the following year (USD 184,500 for 2026)
- §199A threshold and phase-in amounts — IRS revenue procedure each autumn (2026: USD 201,750 single / 403,500 joint; phase-in range USD 75,000 / 150,000)
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