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
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
IRS requires "reasonable compensation" — what you'd pay an arms-length employee to do your job. Bureau of Labor Statistics + Robert Half salary guides are standard references. Too low: IRS audit risk + reclassification. Reasonable benchmark: 30-50% of total profit for typical service businesses.
Compare tax savings vs setup cost
S-Corp election adds: payroll service (USD 600-1,500/year), additional accounting (USD 500-1,500/year), separate Form 1120-S filing. If S-Corp saves less than USD 2-3K/year vs Sole Prop, the overhead probably eats the savings.
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 US small businesses generating USD 50K-USD 500K profit, the typical optimal path is: start as sole prop / single-member LLC → grow profitable → elect S-Corp around USD 60-80K profit when SE tax savings exceed overhead → eventually convert to C-Corp if planning 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, post-TCJA 2018) lets pass-through owners deduct up to 20% of QBI from federal taxable income. Applies to sole prop, LLC, S-Corp partners/shareholders. NOT applicable to C-Corp. Phase-out limits: above USD 191K single / USD 383K joint income, the deduction phases out for "specified service" trades (law, accounting, consulting, health, performing arts) — by USD 241K single / USD 483K joint, fully phased out. For non-SSTB businesses (manufacturing, retail, real estate, most trades), the deduction continues above phase-out 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 salary IRS audit risk is real for S-Corps. The IRS published guidance: pay yourself what an arms-length employee would earn doing your job. Most successful S-Corp owners pay themselves 30-50% of total business income as salary. Going below 25-30% increases audit + reclassification risk."
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 up to 1% on gross receipts over USD 1.23M but minimal for smaller businesses. 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.
10 Facts About US Business Entity Tax
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 + 15-20% qualified dividend = effective ~33-36% double taxation.
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. Must elect by March 15 to apply to current tax year.
S-Corp overhead: USD 1-3K/year extra for payroll + accounting + 1120-S filing.
S-Corp typically becomes worthwhile at USD 60-80K+ profit — below that, overhead eats savings.
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 profit exceeds approximately USD 60-80K consistently. Below that, S-Corp overhead (payroll + accounting + filing) often exceeds the SE tax savings. Above USD 100K, S-Corp typically saves USD 5-15K+/year vs Sole Prop. Form 2553 must be filed by March 15 for current-year application; late elections can be approved with reasonable cause.
- IRS rule: what you'd pay an arms-length employee to do your job. Most successful S-Corp owners pay 30-50% of total business income as salary. Use BLS, Robert Half, ZipRecruiter, or salary.com to benchmark your specific role + market. Going below 25-30% increases audit risk + potential reclassification (IRS converts distributions back to salary + collects FICA + penalties). Document your reasoning + retention of supporting 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. For business profitability above USD 60-80K: form an LLC for liability protection, then elect S-Corp for tax savings. Best of both worlds. 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). LLC additional fee 0.0625-0.65% on gross receipts. S-Corp 1.5% state tax on profit (in addition to USD 800 minimum). Together: California Sole Prop with low overhead often beats California S-Corp at profits under USD 150K. 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.
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