Compare the total tax burden for sole proprietor, S-Corp, C-Corp, and LLC structures. See QBI deduction, SE tax, payroll tax, and effective rates side by side.
C-Corp: 21% flat federal rate on all taxable income. Sole Prop/Single-Member LLC: SE tax (15.3% up to $184,500, 2.9% above) + ordinary income tax rates, minus QBI deduction (up to 20%). S-Corp: salary portion taxed at payroll rates; distribution portion avoids SE/payroll tax. QBI phase-out starts at $197,300 (single) / $394,600 (MFJ) for specified service businesses. Estimates for educational purposes only — consult a licensed tax professional or CPA.
Business taxes vary dramatically by entity type, and choosing the wrong structure can cost thousands annually. The four main business structures are sole proprietorship (including single-member LLC), S-Corporation, C-Corporation, and partnership/multi-member LLC. Each has a different tax treatment of business income, a different SE or payroll tax exposure, and different administrative requirements.
Sole proprietors pay the full self-employment tax (15.3% on first $184,500 net earnings, 2.9% above) plus ordinary income tax on business profits. However, they benefit from the QBI deduction — up to 20% of qualified business income reduces their taxable income, partially offsetting the SE tax burden. The combined effective rate for a sole proprietor in the 22% bracket with QBI is approximately 35–38% of net business income including SE tax.
S-Corporations split business income into two buckets: a reasonable salary (subject to payroll taxes at the same 15.3%/2.9% rates as SE tax) and distributions (not subject to payroll tax). By optimizing the salary-to-distribution ratio, S-Corp owners reduce the portion of income subject to payroll taxes. An S-Corp owner earning $150,000 who pays themselves a $75,000 salary saves approximately $11,475 in payroll taxes on the $75,000 distribution — minus the increased accounting and filing costs of running an S-Corp.
Alex runs a software consulting business generating $150,000 net income. Single filer in Texas (no state income tax). Comparing sole prop vs. S-Corp (with $80,000 reasonable salary and $70,000 distribution).
The S-Corp election saves Alex approximately $8,968 annually in payroll and SE tax. Against typical S-Corp administrative costs ($2,000–$5,000/year for payroll, state filings, and CPA), the net benefit is $3,968–$6,968 per year. At $150,000 net income, an S-Corp election is generally worthwhile, especially in states with no franchise tax or low flat S-Corp fees.
QBI deduction and specified service businesses
The 20% QBI deduction is one of the most valuable deductions for self-employed individuals, but it phases out for specified service trades or businesses (attorneys, physicians, consultants, financial advisors) above $197,300 in taxable income (single). Non-service businesses — contractors, retailers, manufacturers, real estate — can continue taking the QBI deduction above this threshold subject to W-2 wage limits. Structuring your business to maximize QBI eligibility, such as ensuring sufficient W-2 wages are paid, can preserve tens of thousands of dollars in deductions.
Reasonable compensation for S-Corp owners
The IRS requires S-Corp owner-employees to pay themselves a "reasonable compensation" salary — essentially what you would pay a third-party employee to do your job. Setting the salary too low is a red audit flag and the IRS can reclassify distributions as wages, imposing back payroll taxes and penalties. Safe benchmarks include industry salary surveys, compensation data from comparable employees, and the percentage of income generated by the owner's personal services vs. capital or other employees. Reasonable compensation generally ranges from 40–60% of net S-Corp income for service businesses.
C-Corp considerations: retained earnings and exit
C-Corps benefit from the 21% flat rate on earnings that are retained and reinvested rather than distributed. This makes the C-Corp attractive for businesses that are building capital, reinvesting heavily, or planning a strategic exit where the sale of C-Corp stock qualifies for Qualified Small Business Stock (QSBS) exclusion under Section 1202, which can exclude up to $10 million in capital gains from a C-Corp stock sale. QSBS requires the C-Corp to be originally issued stock in a domestic C-Corp, held for over 5 years, in an eligible business. Consult a tax attorney before relying on QSBS benefits.
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The Qualified Business Income (QBI) deduction allows eligible self-employed individuals and pass-through business owners to deduct up to 20% of their qualified business income. In 2026, the deduction begins to phase out for specified service trades or businesses (law, health, consulting, financial services, etc.) once taxable income exceeds $197,300 (single) or $394,600 (MFJ). For non-service businesses above these thresholds, the deduction is limited by W-2 wages paid and qualified property. The OBBBA extended the QBI deduction and made it permanent. This deduction reduces income tax but does not reduce SE tax.
An S-Corp election makes sense when self-employment income is high enough that the SE tax savings on distributions exceed the additional administrative costs (payroll, tax filings, accounting). The general rule of thumb is that S-Corp election becomes worthwhile at approximately $50,000–$80,000 in annual net profit. An S-Corp owner must pay themselves a reasonable salary (subject to payroll taxes), but any profit above the salary can be distributed as a shareholder distribution, which avoids the 15.3% SE tax. On $100,000 net profit with a $60,000 salary and $40,000 distribution, the SE tax savings on $40,000 is approximately $5,652.
C-Corporations pay a flat 21% federal corporate income tax on all taxable income. This is separate from the owners' personal tax returns. When the C-Corp distributes after-tax profits as dividends, shareholders pay qualified dividend tax rates (0%, 15%, or 20% depending on income). This creates "double taxation" — the corporation pays 21% on profits, then shareholders pay dividend tax on distributions. For high-income owners in the 37% bracket, the combined C-Corp effective rate can be lower than a pass-through due to the 21% rate vs. 37% individual rate, but double taxation at exit makes most small businesses prefer pass-through entities.
A single-member LLC is treated as a "disregarded entity" for federal tax purposes — it is taxed identically to a sole proprietorship on Schedule C. The owner reports business income and expenses on Schedule C, pays self-employment tax (15.3% on first $184,500 of net earnings), and is subject to the same deductions including QBI. The LLC provides legal liability protection that a sole proprietorship does not, but the tax treatment is identical. A multi-member LLC is taxed as a partnership by default. Either type of LLC can elect to be taxed as an S-Corp or C-Corp.
For a business earning $400,000 annually, the comparison works as follows: as a sole proprietor, the owner in the 37% federal bracket owes 37% income tax minus the 20% QBI deduction (net 29.6%) plus SE tax on the first $184,500 — a combined effective rate of approximately 42–45%. As a C-Corp, the corporation pays 21% corporate tax, retaining $316,000 after tax. If the owner takes that as a salary, payroll taxes and income tax apply. If taken as qualified dividends, 20% tax applies — total effective rate of 36.8%. The C-Corp can also retain earnings and reinvest at the 21% rate, deferring personal tax, which benefits businesses that reinvest rather than distribute.