We all know that the only sure things in life are death and taxes. And taxes tend to be the more bothersome of the two when it comes to managing a business. Taxes can take a big bite out of your profits, which is the number one reason to weigh your options when considering business structures.

Let’s start off by looking at the reality of taxes when you’re self-employed. As you may know, when you’re self-employed, you’re required to pay self-employment taxes in addition to your federal income tax.

The purpose of self-employment tax is simply to pay your social security taxes, which your employer would ordinarily deduct if you were not working for yourself. The current self-employment tax rate is 15.3%, which is divided as 12.4% for Social Security and 2.9% for Medicare.

The IRS sets a limit for self-employment taxes on only the first $94,200 of your earnings. Of course, federal income tax for individuals rises with each tax bracket. Federal income tax rates in 2006 for individuals are roughly 15 to 35%, depending on how much money you’re earning.

No matter what you call self-employment – being a contractor, freelancing, running a sole proprietorship – it can add up regardless of the amount of your earnings.

Now let’s look at the different kinds of business structures above a sole proprietorship. An LLC (limited liability company) is often considered the next step when it comes to forming a business.

It’s a common misconception that an LLC offers any kind of tax benefit. On the bright side, there are no corporate taxes because an LLC with a single owner is viewed by the IRS just like a sole proprietorship.

The LLC itself pays no taxes because it’s not considered a separate entity like a corporation. However, as an owner, you are still liable for self-employment taxes since the IRS looks at an LLC as a “pass through entity.” “Pass through” simply means the net profits are passed through to your individual tax return.

While an LLC is a simple business structure that affords sound legal protection, the next rung on the business structure ladder, an S-corporation, offers some additional tax perks.