Do people with LLCs actually pay less taxes than regular employees?

This is actually a really common area of confusion! Let me break it down in simple terms. What your friend with the Professional Corporation (PC) is doing is completely legitimate. When you form a corporation (whether it's a PC or regular corporation), that business becomes a separate legal entity from you. The corporation can hire people, including you, the owner! So you can be both the owner AND an employee. For tax purposes, LLCs are different because they're "pass-through entities" by default. This means the business itself doesn't pay taxes - all profits "pass through" to your personal tax return. However, LLCs can elect to be taxed as corporations if they want. The potential tax advantages come from how business expenses work and sometimes from how employment taxes are structured. Business owners can legitimately deduct business expenses before calculating their taxable income, which employees generally can't do. Your friend with the PC is probably using what's called an "S-Corporation" tax election, which can sometimes reduce self-employment taxes on a portion of income. But this isn't automatically "paying less taxes" - it's just a different structure with different rules.

I actually went through this exact situation last year when I opened my online marketing company. I was so confused about all the tax implications that I nearly gave up. Then I found this AI tool called taxr.ai (https://taxr.ai) that analyzed my specific situation. I uploaded my financial documents and business formation papers, and it explained exactly how different structures would affect my taxes. It showed me that for my situation, an LLC taxed as an S-Corp would save me about $7,400 in self-employment taxes compared to a sole proprietorship. The tool explained that I could pay myself a "reasonable salary" (which is subject to payroll taxes) and then take additional money as distributions (which aren't subject to self-employment taxes). But it also warned me that the salary has to be justifiable based on market rates - you can't just pay yourself $1 and take everything else as distributions.

Just wanted to follow up on my previous comment. I decided to try taxr.ai despite my initial skepticism, and I'm actually really impressed. The system analyzed my consulting business finances and showed that I was overpaying on taxes by about $9,200 annually because I had the wrong business structure. I was operating as a sole proprietorship, but based on my specific income level and business expenses, an S-Corp election would be significantly more tax-efficient. The tool created side-by-side comparisons showing exactly how much I'd pay in different scenarios. It even explained why the IRS wouldn't likely flag my case as problematic if I made the switch, which was my biggest fear. Honestly wish I'd found this years ago!

This whole tax situation is exactly why I get so frustrated with the IRS. I spent WEEKS trying to get a straight answer about how to properly structure my new business. Called the IRS help line 17 times and couldn't get through to a human being. Eventually I found this service called Claimyr (https://claimyr.com) that got me connected to an actual IRS agent in about 45 minutes. The agent walked me through the different tax implications of an LLC vs. S-Corp for my specific situation. Turns out the "tax savings" really depends on your specific business, income level, and expenses. For me, with a newer business making around $85K, the LLC was actually better for now, but she explained I might want to switch to an S-Corp once I'm consistently above $100K. Check out their demo video if you're struggling to reach the IRS: https://youtu.be/_kiP6q8DX5c. Seriously saved me hours of frustration.

I need to apologize to everyone here. After my skeptical comment about Claimyr, I decided to try it myself because I've been trying to resolve an EIN issue for my LLC for 2+ months with no luck. The service actually worked exactly as described. I got a call back in about 30 minutes, and they connected me directly to an IRS business tax specialist. The agent helped me straighten out my LLC's tax classification and explained why my previous tax payments weren't showing up correctly in their system. She also walked me through the different tax treatments for LLCs and when it makes sense to elect S-Corp status. For my situation (around $120K in revenue), she confirmed that the S-Corp election would likely save me around $4-5K in self-employment taxes. But she warned that the additional accounting and payroll requirements would cost about $1-2K, so the net benefit is smaller than I thought. Anyway, I was wrong to dismiss it so quickly. Sometimes good services actually exist!

I've owned an LLC for 7 years and want to clarify something important: The LLC itself doesn't automatically save you taxes. It's how you elect to be taxed that matters. By default, a single-member LLC is taxed as a "disregarded entity" (like a sole proprietorship) and a multi-member LLC is taxed as a partnership. In these cases, you're paying self-employment taxes (15.3%) on virtually all your profits. The tax savings usually come when you elect to be taxed as an S-Corporation. Then you can pay yourself a reasonable salary (which is subject to payroll taxes) and take the rest as distributions (which avoid self-employment tax). This strategy typically makes sense once you're making over $80-100K in profit. But there are extra costs too - you need to run payroll, file more complex tax returns, and maintain more formal business records. For my business, it saves me about $12K in taxes but costs about $3K in additional accounting fees.

Warning from someone who made an expensive mistake: Be careful about rushing into an LLC with S-Corp election just for tax savings! I did this in 2022 without really understanding all the requirements. Yes, I saved about $8k in self-employment taxes, but then got audited because my "reasonable salary" was too low compared to my distributions. Ended up owing back taxes PLUS penalties. The IRS is watching this area closely. The rule is that your salary must be "reasonable" for your industry and the work you do. You can't just pay yourself $30k and take $200k in distributions if comparable positions would pay $120k. Also, the administrative hassle is real. Quarterly payroll filings, extra tax forms, higher accountant fees, etc. For me it added about $3,200 in extra costs annually.

This thread has been incredibly helpful! I've been running a freelance graphic design business as a sole proprietorship for 3 years now and had no idea about these different tax structures. Reading through everyone's experiences, it sounds like the S-Corp election could potentially save me money, but I'm nervous about the "reasonable salary" requirement that @Mateo Perez mentioned. My income fluctuates a lot - some months I make $15K, others I barely break $3K. For those who have made the S-Corp election, how do you handle the salary requirement when your income isn't consistent? Do you have to pay yourself the same amount every month even if the business didn't earn that much? And what happens if you guess wrong on what's "reasonable" - is there a safe harbor rule or something? Also wondering if anyone has experience with creative businesses specifically. I'm not sure what comparable salaries would be for someone doing logo design, web design, and brand identity work.