If you work for yourself, one of the first questions you'll face is what legal structure to operate under. The good news: for federal income tax, a sole proprietorship and a single-member LLC are usually treated the same way — both report business activity on Schedule C.
Sole proprietorship
A sole proprietorship is the default structure when you start working for yourself and take no other action. There is no separate business entity; you and the business are the same for legal and tax purposes.
You report income and expenses on Schedule C, and your net profit is subject to both income tax and self-employment tax (15.3%). There is no liability protection — your personal assets are exposed to business debts.
Single-member LLC
A single-member LLC is a legal entity formed under state law that provides limited liability protection. For federal tax, however, it is a 'disregarded entity' by default — meaning it still files Schedule C exactly like a sole proprietor.
So forming an LLC changes your legal protection and how you present your business, but by itself it does not change how you are taxed or reduce your self-employment tax.
When an S-corp election can help
Once profits are consistently high (often cited around $40,000–$80,000+ of net profit), an LLC can elect to be taxed as an S corporation. The owner then pays themselves a reasonable salary subject to payroll tax, and remaining profit can be distributed without self-employment tax — potentially saving thousands.
This adds payroll, a separate return (Form 1120-S), and more bookkeeping, so it is worth modeling with a tax professional. Our sponsor, Arc & Ledger Accounting, is a firm of IRS Enrolled Agents who run these numbers for self-employed clients.
This guide is educational and does not constitute tax advice. For preparation and IRS representation, our sponsor Arc & Ledger Accounting is a firm of IRS Enrolled Agents.