Sole Prop, LLC, S-Corp, C-Corp: What Your Entity Costs You in Taxes

How is founder income taxed? If you're a sole proprietor or single-member LLC, your profit hits your personal return at your ordinary rate plus 15.3% self-employment tax. If you're an S-Corp, payroll taxes hit your salary alone, and distributions escape them. If you're a C-Corp, the business is taxed first and dividends are taxed again. On the same $400K of profit under 2026 rules, those structures produce federal tax bills that differ by about $37,000 a year. Here's the mechanics underneath each one.

Your CPA has floated the S-corp election. Maybe every spring. For a service business at $400K of profit, not acting on it runs about $9,700 a year, the kind of number that's easy to nod at and never do anything about. Five years of nodding is a $49,000 decision.

The S-corp is one of four ways your profit can be taxed, and the others aren't close. The entity decision is the biggest tax variable you control, and most owners set it once, before they were profitable, and never ran the math again.

On the same $400K of profit, the four structures produce federal tax bills that differ by more than $20,000, and at the extremes by $37,000.

Here's how each one is taxed, with the same business run through all four.

The Four Structures, Defined

Four structures cover almost every service business under $5M in revenue. They differ in how the IRS treats the profit, not in what the business does.

Three clarifications that prevent most entity confusion:

• A sole prop and an SMLLC are taxed the same way. The LLC is a legal wrapper around identical tax treatment. Forming one changes your legal exposure. It changes nothing about your tax bill.
• An S-Corp is an election, not a separate entity. An LLC or corporation elects S-Corp treatment by filing Form 2553. The business stays what it was; the tax treatment changes.
• A C-Corp is the default for incorporated entities, and the default most service businesses should not stay in. The worked example below shows why.

The IRS lays out the full set in its Business Structures overview. What the definitions don't show is the money, and the money starts with the one concept three of these structures share.

How Pass-Through Founder Income Is Taxed

In a pass-through entity, the business itself pays no federal income tax. Profit passes through to the owners' personal returns and is taxed once, at individual rates. Sole props, SMLLCs, partnerships, and S-Corps all work this way. The business still files an informational return (1120-S for an S-Corp, Form 1065 for a partnership), but no tax is due at the entity level. Each owner gets a K-1 (or reports on Schedule C, for a sole prop) and pays tax on their share at their ordinary marginal rate.

Pass-through owners also get the Section 199A Qualified Business Income deduction, worth up to 20% of qualified business income, taken before income tax. The One Big Beautiful Bill Act (signed July 4, 2025) made it permanent.

The catch is the SSTB limitation. For "specified service trades or businesses" (law, accounting, consulting, financial services, health, performing arts), the deduction phases out above an income threshold. Under 2026 rules:

• Joint filers: phase-in runs from about $403,500 to $553,500 of taxable income.
• Single filers: about $201,750 to $276,750.

Below the range, an SSTB owner takes the full deduction. Above it, the deduction is gone. Service businesses in the $400K–$2.5M band sit right where this threshold does its work, which is why the example below surprises owners who assumed they'd lost it.

State tax adds another layer, since almost every income-tax state taxes pass-through profit at individual rates, and many now offer a PTET election to work around the federal SALT cap. Both are quarterly-planning decisions, recalibrated against current-year income.

That covers the income tax. The other tax is what makes the sole prop expensive at scale.

Self-Employment Tax: Where Sole Props Bleed

Self-employment tax is the part most owners didn't know about until the bill arrived.

Self-employment tax is the self-employed version of FICA: 12.4% Social Security plus 2.9% Medicare, 15.3% total. An employee splits it with an employer; a sole prop or SMLLC owner pays both halves on net profit. The mechanics, under 2026 rules:

• SE tax applies to 92.35% of net profit, the net-earnings adjustment that approximates the employer-half deduction.
• The 12.4% Social Security portion applies up to the wage base of $184,500 under 2026 rules.
• The 2.9% Medicare portion has no cap. It runs on every dollar.
• An Additional Medicare Tax of 0.9% applies above $200,000 single / $250,000 joint.
• Half the base SE tax is deductible against income tax. That's a real offset, not a wash.

This is why the S-Corp election exists. An S-Corp owner pays FICA on the W-2 salary and nothing on the distributions; the 15.3% stops at the salary line. That single difference is the entire engine of S-Corp savings, and the numbers are clearest side by side.

The $400K Worked Example: Same Profit, Four Tax Bills

Same business, same $400K of net profit, four structures, four federal tax bills.

The setup: $400,000 of net profit before owner pay. Owner is married filing jointly, no other income, $31,500 standard deduction (2026 estimate). Federal only, SSTB (consulting, advisory, professional practice). Figures are rounded and illustrative; the caveats at the end are part of the example.

Structure 1: Sole Prop / SMLLC

• SE tax on the $369,400 base (capped Social Security, uncapped Medicare, 0.9% above $250K): about $34,700.
• Deduct half the base SE tax ($16,800) and the standard deduction ($31,500): taxable income before QBI is $351,700.

The surprise: $351,700 sits below the $403,500 point where the SSTB phase-out begins for joint filers. The full QBI deduction applies, worth about $70,300. The deduction owners assume they've lost is intact here, though push higher or file single and it erodes fast. After it, taxable income is about $281,400 and federal income tax about $52,700.

Bottom line: a sole prop at $400K of profit pays about $87,400 in federal tax. Cash to owner: about $312,600.

Structure 2: S-Corp Election, $125,000 Salary

• W-2 wages: $125,000. Combined FICA: $125,000 × 15.3% = $19,125 (employer half, about $9,600, is a business deduction).
• K-1 pass-through profit: $400,000 − $125,000 − $9,600 = about $265,400
• No Additional Medicare, since wages sit below the $250K joint threshold.
• Payroll tax in total: $19,125, against the sole prop's $34,700. About $15,500 saved on the payroll side.

But the income tax side claws part of it back. QBI runs on the K-1 profit alone, and W-2 salary is not qualified business income, so the deduction drops to about $53,100, about $17,000 less than the sole prop took.

Taxable income lands at about $305,900, federal income tax at about $58,600.

Bottom line: as an S-Corp the same business pays about $77,700 in federal tax. Cash to owner: about $322,300. Net savings vs. sole prop: about $9,700 a year.

That net figure is the honest one. The gross payroll savings without the QBI offset is a number nobody pockets.

Structure 3: C-Corp, Full Distribution

This one isolates the double-tax mechanic; an active owner can't actually take zero salary, but the math shows what the second layer costs.

• Corporate tax: $400,000 × 21% = $84,000, leaving $316,000 for dividends.
• Those dividends are taxed again at qualified-dividend rates plus 3.8% NIIT: about $30,300 at the personal layer.

Bottom line: as a C-Corp paying everything out, the same business pays about $114,300 in federal tax. Cash to owner: about $285,700. The same dollar, taxed twice.

Structure 4: C-Corp, $300,000 Salary Out

Take $300,000 as W-2 salary instead of dividends and the totals shift: about $17,700 corporate tax, about $32,000 in combined payroll tax (both halves), and about $50,100 personal income tax (no QBI on wages).

Bottom line: about $99,800 in total federal tax, and about $66,500 stays locked inside the corporation. The owner's pocket holds about $233,600, and the retained earnings face a second tax layer whenever they come out. This defers the double tax. It doesn't escape it.

The Pattern

The spread between best and worst on the same $400K of profit: about $37,000 a year. The S-Corp's edge over the sole prop is about $9,700, smaller than the raw payroll savings because the QBI offset works against the election at this income. 

>> Want to know what your number looks like? There's a decent chance it's larger than the example's. Use our S-Corp calculator to put your real profit and salary against the sole-prop comparison in about a minute. If you're leaving money on the table, this is where you find out how much.

If You File Single, the Math Flips in the S-Corp's Favor

Everything above assumes married filing jointly. A single SSTB owner at $400K of profit has taxable income well past the $276,750 phase-out point. The QBI deduction is gone under both structures.

On the income-tax line that's worse, but it means the election has no QBI to surrender, so the payroll savings come through almost whole:

• Single sole prop at $400K: about $132,500 in federal tax.
• Single S-Corp at $400K ($125K salary): about $119,000.
• Net savings: about $13,500 a year, versus about $9,700 for the joint filer on identical profit.

The lesson isn't that single filers should always elect. It's that filing status changes the size of the prize, and any comparison that ignores it is guessing. File single at this profit level and the election tends to be worth more, not less.

>> The Caveats

• Figures are illustrative, federal only, with 2026 bracket estimates.
• Real results depend on state tax, retirement contributions, accountable-plan reimbursements, health insurance, and the reasonable salary you can defend.
• Run your own numbers. The Visor S-Corp calculator handles the sole-prop-vs-S-Corp comparison; quarterly tax planning handles the rest.

The example shows what each structure costs. It doesn't tell you which one fits. That depends on facts the table can't see. Want to know what the best structure is for you? Talk to our team — Free.

Which Structure Fits Your Business

It comes down to how much you make, where the business is in its life, and what you do with the money. Stay in the wrong structure and it costs you year after year, with nothing on the return to flag it. Here's where each one lands.

Sole prop / SMLLC fits when:

• Net profit sits below about $80K, where the S-Corp's payroll and filing costs exceed the savings.
• Income swings hard year to year, or the business is early and revenue is unproven.
• The owner is the whole operation and simplicity is worth real money.

S-Corp fits when:

• Net profit clears six figures and holds there.
• The owner can defend a reasonable salary at industry-comparable rates, and will run real payroll, file a separate 1120-S, and keep the documentation discipline the election demands.

The election is a system, not a checkbox. The math behind the S-Corp election threshold covers where the line sits and why.

C-Corp fits when:

• Profit will be reinvested and retained inside the entity, not distributed.
• Investor financing or specific corporate fringe-benefit rules require it.
• The 21% rate plus retained earnings beats pass-through-plus-QBI, which happens at profit levels well above this band.

For a service business at this profit level, the C-Corp is the rare fit. The conditions above point to companies retaining capital or raising outside money, not to a $400K consulting practice taking its profit home.

Partnership / multi-member LLC fits when:

• Multiple owner-operators hold different equity stakes, tax allocations need flexibility an S-Corp's pro-rata rule can't deliver, or a joint venture needs separate basis tracking per partner.

Among the service businesses Visor works with, the pattern runs about 75% of owners best served by the S-Corp election, about 15% by SMLLC, about 10% by partnership structures, and a thin sliver by C-Corp.

But the right structure is only half of it. It still has to be filed right, year after year, by someone who understands it. 

Nick Gray at TriPeak.com came to Visor after a previous provider misfiled a K-1 and filed state returns for an entity that didn't owe that state a dime. Not judgment calls. A generic template dropped onto a structure the provider never understood, and the cleanup cost more than the original work. The structure is the decision. The system that runs it is what makes it stick.

Whatever structure you're in, the rules underneath it shifted this year, and the shifts favor pass-through owners.

The Rules in Effect for 2026

The One Big Beautiful Bill Act did most of this in 2025. Here's what applies for 2026.

• QBI is permanent, and its SSTB phase-in ranges widened under the One Big Beautiful Bill Act, which stretched the band by $150,000 (joint) and $75,000 (single). For 2026 that runs about $403,500–$553,500 of taxable income for joint filers and $201,750–$276,750 for single filers. More owners keep more of the deduction, including joint filers at $400K.
• Section 199A now guarantees a minimum $400 deduction for taxpayers with at least $1,000 of QBI from an actively run business (a floor within the QBI rules, not a separate deduction).
• The Social Security wage base rose to $184,500, up from $176,100 in 2025, raising the cap on the 12.4% portion of payroll and SE tax.
• The C-Corp rate held at 21%, unchanged since the TCJA set it.

What to Bring to the Entity Conversation

This post is the frame, not the decision. That belongs in a conversation with a tax team that runs your numbers before the year closes, not after it. Walk in with these five and you skip the discovery and go straight to the answer:

1. Your net profit. Profit before owner pay, the figure every calculation above starts from.
2. Your filing status. Single or joint moves the QBI threshold and, as you saw, the size of the S-Corp prize.
3. Your state. Federal is half the picture. State tax and PTET eligibility decide the other half.
4. Comparable-salary data for your role. What a reasonable W-2 salary looks like for what you actually do, the number the whole S-Corp case rests on.
5. Your retention plans. Whether profit stays in the business or comes out to you, the question that decides whether C-Corp is ever worth a second look.

You now know how each structure is taxed and what sets them apart. Which one is right for you comes down to those five numbers and a read you can't get from an article.

If you're not sure whether your structure fits where the business is now, or you've been told to elect S-Corp and haven't, a 30-minute review settles it. Run your specific numbers against all four structures.

Talk to our team — Free

Frequently asked questions

How is founder income taxed?

It depends on the entity. In a sole proprietorship or single-member LLC, all profit hits the founder's personal return at ordinary rates plus 15.3% self-employment tax. In an S-Corporation, the founder takes a W-2 salary (payroll tax applies) and the rest as distributions (no payroll tax), both taxed personally. In a C-Corporation, profit is taxed at 21% at the corporate level, then again as dividends. On the same $400K of profit under 2026 rules, the structures differ by about $37,000.

What's the difference between self-employment tax and payroll tax?

They're the same tax, Social Security (12.4%) plus Medicare (2.9%), collected two ways. Self-employment tax is what sole props and single-member LLC owners pay on net profit: the full 15.3% on 92.35% of profit, with a deduction for the employer-equivalent half. Payroll tax is what employers and employees pay on W-2 wages, 7.65% each. S-Corp owners pay payroll tax on the salary portion and none on distributions. The Social Security piece caps at the 2026 wage base of $184,500; Medicare has no cap.

How does pass-through taxation work?

In a pass-through entity (sole proprietorship, single-member LLC, partnership, or S-Corporation), the business itself pays no federal income tax. Profit passes through to the owners' personal returns and is taxed once, at individual rates. Owners may qualify for a Section 199A deduction of up to 20% of qualified business income, made permanent under the One Big Beautiful Bill Act. For specified service businesses (consulting, accounting, law, financial services, health), the deduction phases out at higher incomes. Under 2026 rules, that range runs between about $403,500 and $553,500 of taxable income for joint filers.

Are S-Corp distributions taxed?

Your S-Corp profit is taxed at ordinary rates whether or not you take it out. The distribution itself isn't a separate tax event; what it dodges is the 15.3% payroll tax on W-2 wages. That dodge is the engine of S-Corp savings. After the QBI reduction that comes with paying yourself a salary, net annual savings run $5,000–$13,500+ at $150K–$400K of net profit, depending on filing status and the salary defended. The salary side is its own discipline: how the IRS evaluates reasonable salary.

Why is C-Corp called "double taxation"?

A C-Corporation is a separate taxable entity. Profit is taxed at the corporate level at a flat 21% federal rate. When the corporation distributes after-tax profit as dividends, that distribution is taxed again at the personal level, at qualified-dividend rates of 0%, 15%, or 20% depending on income, plus the 3.8% net investment income tax where it applies. The same dollar of profit gets taxed twice, once when the corporation earns it and again when the owner receives it. For service businesses under $5M, that drag makes the C-Corp the least tax-efficient structure in most situations. Questions about your own structure? Talk to our team — Free