Old Li, who sells home furnishings on Pinduoduo, has annual sales of 2 million. Previously, his individual income tax was assessed at a rate of 11% and 3%, amounting to only 20,000 per year. In 2026, he received a notice from the tax bureau stating that his tax assessment would switch to an audited basis. After doing the math, he found that on a profit of 300,000, he would have to pay approximately 45,000 in individual income tax, meaning his total tax burden could rise from 20,000 to between 80,000 and 100,000.

This isn’t an isolated case. In 2026, the ”fixed-rate taxation” system for e-commerce will undergo a major shakeup. The money saved in the past through “fixed-rate taxation” will either have to be repaid or require businesses to keep accurate books. Today, we’ll set the record straight: which is more cost-effective—a sole proprietorship or a corporation?

01

Three Ironclad Rules for 2026

First.Live-streamed e-commerce, paid content, and virtual goods are all prohibited from being subject to fixed-rate taxation.... Audits must be conducted based on actual profits. These types of businesses have high gross margins and low costs; their tax burdens were extremely low in the past, but they have been singled out this year.

Second.Only sole proprietorships and single-member limited liability companies are eligible to apply for a tax assessment.... All business entities (including single-member limited liability companies) are subject to tax assessment based on audited financial statements, with no room for negotiation.

Third.A physical business location is required.. Sole proprietors applying for profit assessment must provide a lease agreement, utility bills, and employee social security records; applications from those working from home are generally not approved. Furthermore, the assessed profit rate must not be lower than 70% of the industry's average profit margin.

02

How much do self-employed individuals have to pay?

Individual business owners’ business income is subject to a five-tier excess-progressive income tax rate ranging from 5% to 35%. Under the audited accounting tax collection method, an annual profit of 300,000 would result in an income tax payment of approximately 20,000 to 30,000; if the business can provide invoices for purchases, rent, shipping costs, and marketing expenses to claim deductions, the actual tax paid will be even lower.

Regarding VAT, individual businesses with monthly sales of 150,000 or less are exempt; the portion exceeding that amount is subject to a tax rate of 1% or 3%. In 2026, there will also be a ”double exemption” benefit: businesses with annual sales of no more than 1.2 million will be fully exempt from both VAT and individual income tax. Therefore, small sellers can keep their tax burden extremely low by taking full advantage of these tax-exemption thresholds.

However, please note: The platform’s data is directly linked to the tax authorities in its entirety, so reported income must match the platform’s transaction records; a discrepancy exceeding 100,000 will trigger an alert. Receiving payments through personal accounts or concealing income will be deemed tax evasion, resulting in back taxes plus a fine ranging from 0.5 to 5 times the amount owed.

03

How is a limited liability company calculated?

Corporate Income Tax for Limited Liability Companies: For annual profits not exceeding 3 million, the effective tax rate is 5% (calculated at a reduced rate of 25% and paid at 20%); for amounts exceeding 3 million, the full rate of 25% applies.

The comparison is quite clear: In a case like Old Li’s, with an annual profit of 300,000, a sole proprietor would pay 20,000 to 30,000 in taxes after an audit; if he were to use a limited liability company, the corporate income tax would be about 15,000, but he’d also have to pay 20% in personal income tax on the dividends distributed to shareholders. SoFor small and medium-sized sellers, operating as sole proprietors is often more cost-effective., provided that cost invoices can be obtained in compliance with regulations.

However, the advantage of a limited liability company lies in its scale: for profits under 3 million, the tax rate is uniformly set at 5%, and it allows for issuing special invoices, claiming export tax rebates, and facilitating capital operations. For sellers with annual sales in the tens of millions, a limited liability company combined with a standardized input tax chain is the right choice. The core of e-commerce taxation in 2026 will be: data transparency, a strict 5 million threshold with no leeway, the continuation of tax incentives, and thorough audit scrutiny. Choosing the right business entity is more important than figuring out how to pay less tax.

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