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Taxorly

LLC vs S-Corp: Which is Better for Freelancers in 2025?

•By FFH Editorial Team

The Growth Trap of Sole Proprietorships

When you start freelancing, you are automatically considered a Sole Proprietor by the IRS. This is the simplest structure, but it comes with a major downside: you pay the 15.3% Self-Employment Tax on every single dollar of profit you make.

As your income scales past $60,000 to $80,000 per year, this tax becomes incredibly burdensome. The solution? Structuring your business differently.

Single-Member LLC

A Single-Member LLC is a legal structure that protects your personal assets (house, car, savings) from business liabilities. However, it does not change how you are taxed. By default, the IRS taxes a Single-Member LLC exactly like a Sole Proprietor. You still pay 15.3% SE tax on all profits.

The S-Corp Advantage

An S-Corp is an IRS tax election (not a business structure itself; you form an LLC and elect to be taxed as an S-Corp).

With an S-Corp, you split your business profit into two categories:

  1. W-2 Salary: You must pay yourself a "reasonable salary". You pay the 15.3% SE tax on this portion.
  2. Owner Distributions: The remaining profit can be taken out of the business as distributions. You do not pay the 15.3% SE tax on distributions.

When should you make the switch?

Generally, the math starts to work in your favor when your net profit exceeds $80,000/year.

Before this point, the administrative costs of running an S-Corp (payroll software like Gusto, extra accounting fees, corporate tax returns) often outweigh the tax savings. Use our S-Corp Savings Calculator to see your exact break-even point.