Tax Checklist by Entity Type: LLC, S-Corp, Sole Prop

Your entity structure determines what you file, when you file, and how much you owe.

This guide breaks down the tax requirements for the three most common solo business structures: Sole Proprietor, Single-Member LLC, and S-Corporation.

Important disclaimer: This is general information, not tax or legal advice. Tax laws vary by state and change frequently. Consult a qualified CPA or tax professional for your specific situation.

Quick Entity Overview

Sole Proprietorship:

• Simplest structure
• No separate legal entity
• Taxes filed on personal return (Schedule C)
• No liability protection

Single-Member LLC:

• Separate legal entity
• Taxed as sole prop by default (can elect S-Corp)
• Some liability protection
• Requires state registration

S-Corporation:

• Separate legal entity (LLC or Corp electing S-Corp status)
• Pass-through taxation (income flows to owner)
• Requires payroll and reasonable salary
• More paperwork, potential tax savings

Not sure which to choose? See our Solo Finance Setup guide for a detailed comparison.

Tax Checklist: Sole Proprietor

Who This Is For

• Just starting out
• Testing a business idea
• Very small operations (under $20K revenue)
• Want simplest possible setup

Setup Requirements

Federal:

• No EIN required (can use SSN) unless hiring employees
• No separate business tax return

State:

• Register "Doing Business As" (DBA) if using business name
• State business license (varies by state/county)
• Sales tax permit (if selling taxable goods/services)

Time to set up: 1-2 hours

Cost: $0-200 (depending on state fees)

Annual Tax Filing

Federal:

• Form 1040 (personal tax return)
• Schedule C (profit or loss from business)
• Schedule SE (self-employment tax: Social Security + Medicare)
• Form 1040-ES (quarterly estimated taxes)

State:

• State income tax return (if applicable)
• Sales tax returns (monthly, quarterly, or annual)
• Local business taxes (varies by city/county)

Due dates:

• Quarterly estimated taxes: April 15, June 15, Sept 15, Jan 15
• Annual return: April 15 (or Oct 15 with extension)

What You'll Owe

Federal taxes:

• Income tax: 10-37% (based on total household income)
• Self-employment tax: 15.3% on first $160,200 (2023), 2.9% above that
• Total effective rate: 25-40% (varies widely)

Example calculation:

Net profit: $60,000
Self-employment tax: $8,478 (15.3% of $55,412 after deduction)
Income tax (est.): $9,000 (varies by total household income)
Total federal: ~$17,500 (29%)

State taxes:

• 0-13% depending on state
• Local taxes vary

How much to save: 25-35% of net profit (covers federal + state + local)

Quarterly Estimated Tax Payments

Why quarterly? The IRS requires payment as you earn. Waiting until year-end triggers penalties.

How to calculate:

Prior year tax ÷ 4 = Quarterly payment (safe harbor)
OR
Estimated current year tax ÷ 4 = Quarterly payment

Safe harbor rule: Pay 100% of prior year's tax (110% if high earner) and avoid penalties, even if you owe more this year.

How to pay:

• IRS Direct Pay (free, online)
• EFTPS (Electronic Federal Tax Payment System)
• Mail check with Form 1040-ES voucher

Common Deductions

• Home office (if dedicated space)
• Business equipment and software
• Internet and phone (business portion)
• Vehicle expenses (standard mileage or actual)
• Supplies and materials
• Contract labor
• Professional services (legal, accounting)
• Insurance premiums
• Business travel and meals (50% for meals)
• Self-employment health insurance
• Retirement contributions (SEP-IRA, Solo 401k)

The rule: Ordinary and necessary for your business. Keep receipts and document business purpose.

When to Upgrade

Consider LLC or S-Corp when:

• Revenue exceeds $50K/year (LLC for liability protection)
• Net profit exceeds $60K/year (S-Corp for tax savings)
• You have employees
• You want liability protection

Tax Prep Options

DIY:

• FreeTaxUSA ($15 for federal + state)
• TurboTax Self-Employed ($119+)
• H&R Block Self-Employed ($85+)

CPA:

• $300-800 for simple sole prop return

Tax Checklist: Single-Member LLC

Who This Is For

• Established solos who want liability protection
• Revenue $20K-100K/year
• Want separation between personal and business
• Not ready for S-Corp complexity

Setup Requirements

Federal:

• Get EIN (even for single-member)
• File as sole prop by default (Schedule C on personal return)

State:

• File LLC formation documents (Articles of Organization)
• Get state tax ID (if required)
• Annual report/franchise tax (varies by state)
• Register for sales tax (if applicable)

Time to set up: 2-4 hours

Cost: $100-800 (varies by state)

• Formation: $50-500
• Registered agent: $0-300/year
• Annual fees: $0-800/year

Annual Tax Filing

Default (taxed as sole prop):

• Form 1040 (personal return)
• Schedule C (business profit/loss)
• Schedule SE (self-employment tax)
• Form 1040-ES (quarterly estimated)

State:

• State income tax return
• Annual report + franchise tax (varies by state)
• Sales tax returns (if applicable)

Due dates:

• Quarterly estimated: April 15, June 15, Sept 15, Jan 15
• Annual return: April 15 (or Oct 15 with extension)
• State annual report: varies (often anniversary of formation)

What You'll Owe

Same as sole prop by default:

• Income tax: 10-37%
• Self-employment tax: 15.3% (on first $160,200)
• Total: 25-40%

State:

• Franchise tax: $0-800/year (varies by state)
• Income tax: 0-13%

How much to save: 25-35% of net profit + state fees

S-Corp Election (Optional)

Single-member LLCs can elect S-Corp tax treatment.

Why? Potential tax savings if profitable.

How? File Form 2553 with the IRS (deadline: March 15 or within 75 days of formation).

When it makes sense:

• Net profit exceeds $60K/year
• You can justify a reasonable salary
• You're willing to run payroll

See S-Corp section below for details.

Common Deductions

Same as sole prop, plus:

• LLC formation and annual fees
• Registered agent fees
• State-specific business taxes

When to Upgrade to S-Corp

Consider S-Corp election when:

• Net profit consistently exceeds $60K/year
• You want to reduce self-employment tax
• You can handle payroll and extra compliance

How to decide:

If: (Net profit - Reasonable salary) × 15.3% > $2,000
Then: S-Corp might save you money

Example:
Net profit: $100,000
Reasonable salary: $60,000
Savings: ($100K - $60K) × 15.3% = $6,120/year

Tax Prep Options

DIY:

• Same as sole prop ($15-120)

CPA:

• $500-1,200 (LLC return + personal)

Tax Checklist: S-Corporation

Who This Is For

• Profitable solos (net profit $60K+/year)
• Want to minimize self-employment tax
• Willing to handle payroll and compliance
• Established businesses with consistent revenue

Setup Requirements

Federal:

• Form an LLC or Corporation
• Get EIN
• File Form 2553 (S-Corp election) by March 15 or within 75 days of formation
• Set up payroll system

State:

• Register business entity
• File S-Corp election with state (if required)
• Register for state payroll taxes
• Set up workers' comp (if required)

Time to set up: 4-8 hours (or hire help)

Cost: $500-2,000 first year

• Formation: $100-800
• Payroll software: $40-150/month
• CPA for setup: $500-1,500

Annual Tax Filing

Federal:

• Form 1120-S (corporate tax return)
• Schedule K-1 (pass income to owner)
• Form 1040 (personal return with K-1)
• Quarterly payroll taxes (Form 941)
• Annual W-2 (for yourself)
• Form 940 (annual unemployment tax)
• Form 1040-ES (estimated taxes on distributions)

State:

• State corporate/franchise tax return
• State payroll tax returns (quarterly)
• Annual report
• Sales tax (if applicable)

Due dates:

• Form 1120-S: March 15 (or Sept 15 with extension)
• Form 941 (payroll): April 30, July 31, Oct 31, Jan 31
• Personal return: April 15 (or Oct 15 with extension)
• State varies

What You'll Owe

The S-Corp advantage: You split income into salary + distributions. Only salary is subject to payroll taxes.

Example:

Net profit: $100,000
Reasonable salary: $60,000
Distribution: $40,000

Taxes on salary:
- Payroll taxes (15.3%): $9,180
- Income tax (est. 22%): $13,200
Total on salary: $22,380

Taxes on distribution:
- Payroll taxes: $0 (this is the savings)
- Income tax (est. 22%): $8,800
Total on distribution: $8,800

Total tax: $31,180 (31%)

Compare to LLC/Sole Prop:
- Payroll taxes (15.3%): $15,300
- Income tax (est. 22%): $22,000
Total: $37,300 (37%)

S-Corp savings: ~$6,100/year

The catch: Your salary must be "reasonable" for your role and industry. The IRS audits suspiciously low salaries.

How much to save: 30-40% of total income (including distributions)

Reasonable Salary Guidelines

What's reasonable?

• Industry standards for your role
• Your qualifications and experience
• Time spent working in the business
• Comparable salaries for similar roles

Rule of thumb:

• 40-60% of net profit as salary
• Minimum: $50K-60K for professional services
• Don't go below $40K just to save taxes

Red flags:

• $20K salary on $150K profit (too low)
• 100% salary, 0% distributions (defeats the purpose)

Where to research:

• Bureau of Labor Statistics (bls.gov)
• Salary.com, Glassdoor, Payscale
• Industry salary surveys
• Ask your CPA

Payroll Requirements

You must run payroll for yourself.

Options:

Payroll software:

• Gusto: $40+/month (most popular for solos)
• QuickBooks Payroll: $50+/month
• OnPay: $40+/month
• Wave Payroll: $40+/month

What they handle:

• Calculate payroll taxes
• File quarterly and annual payroll tax forms
• Generate W-2s
• Manage withholdings

Frequency:

• Monthly or semi-monthly (your choice)
• Consistent schedule (IRS requires regularity)

S-Corp Compliance Requirements

Quarterly:

• File Form 941 (payroll taxes)
• Pay yourself salary (consistent schedule)
• Review profit for potential distributions

Annual:

• Form 1120-S (corporate return) - Due March 15
• Issue K-1 to yourself
• File W-2 and W-3
• File Form 940 (unemployment tax)
• State annual report and franchise tax
• Hold annual meeting (document minutes)

Pro tip: Keep corporate minutes, even if you're the only owner. It protects your corporate veil.

Common Deductions (S-Corp)

Same as LLC, plus:

• Payroll processing fees
• Reasonable salary (business expense)
• Employer portion of payroll taxes
• Workers' comp insurance (if required)
• Corporate filings and fees

Special deduction: Health insurance premiums (deducted on corporate return, then added back to W-2)

When S-Corp Doesn't Make Sense

Skip S-Corp if:

• Net profit under $60K/year (savings won't cover costs)
• Revenue is inconsistent (hard to maintain payroll)
• You hate paperwork (seriously, there's a lot)
• You don't want to run payroll monthly
• You're not profitable yet

Cost of compliance:

• Payroll software: $480-1,800/year
• CPA for S-Corp return: $1,000-3,000/year
• State fees: $200-800/year
• Total: $1,700-5,600/year

Break-even: You need to save at least $2,000-3,000/year in taxes to justify S-Corp.

Tax Prep Options

DIY:

• Not recommended for S-Corp (too complex)

CPA:

• $1,500-3,000 for S-Corp return + personal return
• Worth every penny

Entity Comparison Table

Feature	Sole Prop	Single-Member LLC	S-Corporation
Setup complexity	Easiest	Easy	Complex
Setup cost	$0-200	$100-800	$500-2,000
Annual cost	$0-200	$100-1,000	$1,700-5,600
Liability protection	None	Yes	Yes
Tax filing	Schedule C	Schedule C (default)	Form 1120-S + K-1
Self-employment tax	15.3% on all profit	15.3% on all profit	15.3% on salary only
Payroll required	No	No	Yes
Best for revenue	Under $20K	$20K-100K	$60K+
Tax savings potential	None	None (unless S-Corp)	High (if profitable)
Paperwork	Minimal	Light	Heavy

The Decision Framework

Start Here: Sole Proprietor

If:

• First year of business
• Revenue under $20K
• Testing an idea
• Want simplest setup

Action: Just start. File Schedule C next year.

Upgrade to LLC

If:

• Revenue $20K-60K
• Want liability protection
• Established business
• Not ready for S-Corp

Action: Form LLC, stay taxed as sole prop.

Elect S-Corp

If:

• Net profit $60K+/year consistently
• Willing to run payroll
• Want tax savings
• Can justify reasonable salary

Action: Form LLC, file Form 2553 for S-Corp election.

The Math

Calculate your potential S-Corp savings:

Step 1: Estimate reasonable salary (40-60% of profit)
Step 2: Calculate self-employment tax on distributions
        (Net profit - Salary) × 15.3% = Savings

Step 3: Subtract S-Corp costs (~$2,500/year)

If savings > $2,500, consider S-Corp

Example:

• Net profit: $80,000
• Reasonable salary: $50,000
• Distribution: $30,000
• Savings: $30,000 × 15.3% = $4,590
• Costs: $2,500
• Net benefit: ~$2,000/year

At $100K profit, S-Corp makes sense. At $50K profit, it probably doesn't.

State-Specific Considerations

Important: State rules vary significantly.

High-tax states (CA, NY, NJ, etc.):

• Higher state filing fees
• State-level S-Corp taxes
• More compliance requirements

No-income-tax states (TX, FL, WA, etc.):

• Simpler state filing
• Possible franchise/gross receipts tax
• May still require annual reports

Always check:

• State LLC/Corp formation fees
• Annual report requirements
• State-level S-Corp election (if needed)
• Franchise or excise taxes
• State payroll taxes

Find your state's requirements: Search "[Your State] Secretary of State business formation"

Your Action Plan

If You're Starting (Sole Prop)

This week:

• Check if you need local business license
• Open business bank account
• Start tracking income/expenses
• Set aside 30% of income for taxes

Before year-end:

• Make quarterly estimated tax payments
• Organize receipts and records
• Research deductions

Tax season:

• File Schedule C with personal return
• Consider LLC for next year if revenue growing

If You're Forming an LLC

This month:

• Choose state to form in (usually your home state)
• File Articles of Organization
• Get EIN
• Open business bank account

First quarter:

• Set up bookkeeping system
• Create operating agreement (even for single-member)
• File any state registrations

Ongoing:

• Make quarterly estimated payments
• File annual report (check your state deadline)
• Consider S-Corp election if profitable

If You're Electing S-Corp

Before you elect:

• Confirm net profit justifies S-Corp ($60K+ consistently)
• Research reasonable salary for your role
• Budget for payroll software + CPA
• Understand ongoing compliance

Setup:

• Form LLC or Corp (if not already done)
• File Form 2553 (by March 15 or within 75 days)
• Set up payroll system
• Hire CPA familiar with S-Corps

First year:

• Run payroll consistently (monthly or semi-monthly)
• File quarterly Form 941
• Keep corporate minutes
• File Form 1120-S by March 15

Common Tax Mistakes (Avoid These)

1. Not separating personal and business finances

• Makes bookkeeping nightmare
• Jeopardizes liability protection
• Triggers audit risk

2. Skipping quarterly estimated payments

• Results in penalties and interest
• Creates year-end cash crunch

3. Not saving enough for taxes

• 30% minimum, not 10%
• Distributions from S-Corp are still taxable income

4. Setting S-Corp salary too low

• IRS audits unreasonably low salaries
• Penalties can exceed tax savings

5. Missing state filing deadlines

• Late fees and penalties
• Risk of administrative dissolution

6. No documentation for deductions

• Deductions denied without receipts
• Need business purpose documented

7. DIY-ing S-Corp taxes

• Too complex for most people
• Hire a CPA, seriously

When to Hire a CPA

DIY is fine for:

• Simple sole prop
• Revenue under $50K
• No employees
• Straightforward deductions

Hire a CPA if:

• Forming an LLC or S-Corp
• Revenue over $75K
• Multiple income streams
• Claiming home office, vehicle, complex deductions
• You want tax planning (not just filing)

What to expect:

• Sole prop: $300-800
• LLC: $500-1,200
• S-Corp: $1,500-3,000
• Tax planning: $1,000-5,000+

ROI: A good CPA often saves more than they cost through deductions and planning.

The Bottom Line

Your entity structure is not forever.

Start simple (sole prop), upgrade when it makes sense (LLC for protection, S-Corp for savings).

The progression:

1. Year 0-1: Sole prop (simplest, test the idea)
2. Year 1-2: LLC (liability protection, still simple taxes)
3. Year 2+: S-Corp (tax savings if profitable enough)

Don't over-engineer early. Don't ignore optimization later.

Most solos should start as sole prop or LLC. Only elect S-Corp when the math clearly works.

Run the numbers. Talk to a CPA. Make an informed decision.

Your taxes will thank you.

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Need help setting up your full finance stack? Read our Solo Finance Setup guide for banking, bookkeeping, and taxes.

Want to compare bookkeeping tools? Check out our Bookkeeping Stack for Solos guide.

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