There are 3 main types of taxes:
Social Security & Medicare (SSM) [social]
Federal Income Tax (FIT) [federal]
State Income Tax (SIT) [state]
Let’s compare which option is more beneficial for taxes assuming a gross income of $10,000 per month ($120,000 per year) and, for simplicity, $20,000 in business expense deductions.
SIT will be the same for any type of company - it depends only on the state where you live. In some states, for example Florida or Washington (up to $250,000 per year), this tax does not exist at all, while in New York it is 10.9%.
You can check your state tax rate here:
taxfoundation.org/publications/state-individual-income-tax-rates-and-brackets/
But we will skip it and move on.
Sole Proprietor and a single-member LLC are taxed the same.
If an LLC has multiple members/owners, it is taxed as a Partnership.
So, Federal Income Tax on $100,000 of annual profit will be:
Sole Prop / Single-member LLC / Partnership*: $9,866
S-Corporation: ~$11,626
*For a Partnership calculation, each partner naturally has their own share of income, and this number reflects $100,000 of profit for one partner. If $100,000 is the total profit of the company and there are 2 partners, then the taxes would be $5,842 for both, or $2,921 per person.
If you file jointly with a spouse and/or have children, the numbers will of course be different. You can estimate FIT yourself using this site:
www.ameriprise.com/financial-news-research/financial-calculators/marginal-tax-rate-calculator
So here is what we have: FIT in SP, LLC, and Partnership is $1,760 less than in an S-Corp.
This happens because Sole Prop and Partnership have a 20% “discount” on the entire company profit, while an S-Corp has it only on part of it.
And now we get to the most important part. In an S-Corp you must pay yourself a salary - specifically, Reasonable Compensation. The remaining amount will be company profit (which you also take). In my example, with $100,000 of profit in an S-Corp: $40,000 is “salary” and $60,000 is company profit.
The largest tax is Social Security and Medicare. Together they are 15.3% (or 14%), without going into details. SP, single-member LLC, and Partnership pay this on all income, while an S-Corp pays it only on the “salary.”
So SSM will be:
Sole Prop / Single-member LLC / Partnership*: $15,300
S-Corporation: $6,120
So the difference is $9,180 in favor of the S-Corp.
Total tax on $100,000 profit:
❌ Sole Prop / Single-member LLC / Partnership*: $25,166
✔️ S-Corporation: $17,746
Of course, I cannot cover all nuances here, but the idea is clear - S-Corporation is the obvious winner. That is why many people choose this tax treatment. By the way, if you did not know, LLCs can also choose or change their tax status to S-Corp.
However, an S-Corp is not that simple - it has its own nuances.
Disclaimer: The information provided here is for general informational purposes only and does not constitute legal advice. Immigration rules may change. For guidance on your specific situation, always consult official sources or a qualified immigration attorney.
