If you are an independent contractor or freelancer and are trying to decide between operating as a sole-proprietor or an S corporation, there are about 3 factors you want to consider: simplicity, legal protection, and taxes. If you earn over $30,000 annually, it makes sense in 99% of scenarios to form an LLC, which then ELECTS to be treated as an S corp for tax purposes with the IRS.
Doing business as a sole proprietor (no entity) is the simplest, but it leaves you exposed legally and from a tax standpoint. Forming a C corporation provides excellent legal protection, but it has many onerous requirements and is horrible from a tax standpoint. However, forming an LLC with an S-election gives you the best of all worlds. It is relatively simple to maintain, provides ample legal protection, and also allows you to shield a portion of your income from self-employment taxes (which can be very substantial).
When using an S Corp, you’re viewed by the IRS as an owner of your LLC as well as an employee. This means that you’re able to pay yourself a salary and take out dividends. The salary is subject to self-employment taxes (payroll taxes) and the dividends aren’t.
Here’s an example of the benefits for you:
In this scenario, the independent contractor makes $75,000, so let’s see what the difference is between being treated as sole-proprietor VS an S-corp. Keep in mind that the self-employment taxes = 15.3%.
As you can see, an S corporation can generate significant savings–even more than $5,000 per year. So, why would you pay more taxes when you don’t have to? Let’s chat today to see how the S Corp strategy can be beneficial for you.
(For more information about business structures, click here)
