Does forming an LLC save taxes?

Formation sites often mention "tax benefits" next to the LLC, and many freelancers form one expecting a smaller tax bill. For a one-owner LLC, federal tax stays the same unless you make an election. This post shows why, with the numbers. It's part of our business setup series.

How the IRS taxes a single-member LLC

The LLC is a state-law entity. For federal tax, the IRS classifies a single-member LLC as a disregarded entity unless it files to be treated otherwise: its income and expenses go on your Schedule C, and the profit is subject to self-employment tax on Schedule SE. For 2026 that's 12.4% for Social Security on net earnings up to $184,500 plus 2.9% for Medicare, applied to 92.35% of your profit. The SBA puts it plainly: LLC owners are considered self-employed and pay self-employment tax.

Worked example: $80,000 of profit

Deductions don't depend on the LLC

Business expenses, the home office deduction, the business mileage rate, health insurance premiums, a SEP-IRA or solo 401(k) and the 20% QBI deduction all work the same for a sole proprietor. Forming an LLC doesn't add a single deduction; it only adds the formation and state fees, which are deductible but still money out. If you want a lower bill without changing structure, the freelance tax deductions checklist and the QBI deduction for freelancers are where to look.

State costs can make it worse

Federal tax is only half the picture. Many states charge an LLC a yearly report fee or tax that a sole proprietor never pays. California is the steepest common case: an $800 annual tax every year the LLC exists, due even with no income, plus a separate LLC fee based on total California income for larger businesses. The fee is a deductible business expense, but a deduction only gives back your tax rate on it, so most of the $800 stays a cost. Check your Secretary of State's fee page before you count on any saving.

Where the savings people mention come from

The real tax change is the S corp election. An LLC can file Form 2553 and then pay you a reasonable salary through payroll; Social Security and Medicare apply to the salary, not to the profit you take as distributions. With the $80,000 copywriter above and a $45,000 salary, federal tax drops to about $13,509, a $3,138 difference. Payroll service and an S corp tax return cost around $1,660 a year at the providers we priced, and California would charge at least $800, which leaves her about $678 ahead there compared with staying a sole proprietor. The full break-even math is in when a freelancer should elect S corp.

So the honest answer to "will an LLC save me taxes" is no, and "will an S corp election save me taxes" is "maybe, at higher profits." If liability is your reason, see LLC vs sole proprietor. To see your own self-employment tax, use the self-employment tax calculator.

Where SoloWOS fits

SoloWOS doesn't do tax returns. Its Expenses tool lets you log business expenses with receipts and shows monthly profit with a tax set-aside estimate at the percentage you choose, which works the same whether or not you have an LLC.

Planning estimates from 2026 federal figures (Rev. Proc. 2025-32, SSA) for a single filer with no other income. Not tax advice; state taxes and your own situation change the result, so check yours with a CPA or enrolled agent.