As a sole proprietor, 100% of your profits are subject to self-employment taxes. The self-employment tax is 15.3% of all profits up to $94,200 (for 2006). Profits beyond the first $94,200 are subject to a 2.9% self-employment tax. If the profits from your business are $200,000, you will pay self employment taxes of $17,037.

Owners of limited liability companies (LLCs) who are active in the company operations are generally subject to the same self-employment tax.

Your business can reduce its self-employment tax obligation by creating an S-corporation. S-corporation profits are not subject to employment taxes. The owners wages, however, will be subject to employment taxes like any other employee.

Many S-corporation owners don