Scenario

👩‍🎨 Freelance graphic designer

  • Annual profit (after expenses): $100,000

  • No employees

  • Lives in a state with state income tax (ignore state tax for now, just focus on federal).

1. Sole Proprietorship

  • Business profit = personal income.

  • Pays income tax + self-employment tax (≈15.3%) on all $100,000.

Taxes:

  • Self-employment tax = ~$15,300

  • Income tax (varies by bracket; say ~$13,000 for mid-level rate)

  • Total federal taxes ≈ $28,300

Liability: Personal assets at risk if sued.

2. Partnership (2 partners, each 50%)

  • Each partner reports $50,000 income.

  • Each pays income tax + self-employment tax on their $50k.

Taxes per partner:

  • Self-employment tax ≈ $7,650

  • Income tax ≈ $6,500

  • Total ≈ $14,150 each (≈$28,300 combined)

Liability: Each partner is personally responsible — even for the other’s mistakes — unless it’s an LLP.

3. LLC (default taxation)

  • Single-member LLC taxed same as sole proprietorship.

  • Multi-member LLC taxed same as partnership.

So in our $100,000 example:

  • Taxes ≈ $28,300 (same as sole proprietorship).

  • BUT liability protection shields personal assets (house, car, savings).

4. LLC taxed as an S-Corp (common tax strategy)

  • Owner is both employee and shareholder.

  • Pays themselves a “reasonable salary,” say $60,000.

    • Salary taxed with payroll taxes (≈15.3% split between employer and employee, but both sides come from owner’s pocket).

  • Remaining $40,000 is taken as a distribution, not subject to self-employment tax.

Taxes:

  • Salary payroll taxes ≈ $9,180

  • Income tax on full $100k (≈$13,000)

  • Total ≈ $22,180

💡 Savings: About $6,000 less than default LLC/sole proprietorship.

Liability: Same protection as an LLC.

5. Corporation (C-Corp)

  • Pays corporate income tax (21%) on $100,000 profit = $21,000.

  • If owner takes remaining profit as dividends, taxed again at ~15% = ~$11,850.

  • Total taxes ≈ $32,850

Liability: Strong protection, but worst tax result here for a freelancer.

Key Takeaways

  • Sole Proprietorship: Easy, but highest risk + full self-employment tax.

  • Partnership: Same as sole prop for taxes, but shared risk.

  • LLC (default): Same taxes as sole prop, but with liability protection.

  • LLC (S-Corp election): Can save $5–7k a year in taxes if profits are high enough.

  • C-Corp: Often worst for small freelancers (double taxation).

For a freelancer or small business making ~$100k profit, the LLC with S-Corp election is usually the sweet spot: liability protection + tax savings.

Structure Federal Taxes (Approx) Liability Protection Notes
Sole Proprietorship $28,300 (income tax + full self-employment tax) None (personal assets at risk) Easiest to start, but riskiest.
Partnership (50/50) $14,150 each (≈$28,300 total for both partners) None for general partnerships (unless LLP) Shared profits & shared risk.
LLC (default taxation) $28,300 (same as sole proprietorship) Yes, protects personal assets Most common choice; flexible and simple.
LLC (S-Corp election) $22,180 (salary subject to payroll tax + distributions not) Yes Saves ~$6,000 in taxes vs default LLC. Best for profits >$60k.
C-Corp $32,850 (corporate tax + dividend tax = double taxation) Yes Strong protection, but tax-inefficient for small freelancers.