When freelancers start making consistent income, one of the first financial decisions they face is choosing the right business structure. Many default to operating as sole proprietors, but others look into forming an LLC (Limited Liability Company) for added legal protection and flexibility. But what does this mean for taxes? And should freelancers consider electing S-Corp status? Let’s break it down.
Sole Proprietor vs. LLC: What’s the Difference?
A sole proprietor is the simplest business structure—just you and your work. You report income on Schedule C of your tax return, and all earnings are subject to self-employment tax (15.3%) plus income tax.
An LLC, on the other hand, is a legal structure that provides liability protection but doesn’t change how taxes work by default. A Single-Member LLC (SMLLC) is still taxed like a sole proprietor unless the owner chooses otherwise.
Can a Single-Member LLC Be an S-Corp?
Yes! A Single-Member LLC can elect S-Corp taxation by filing Form 2553 with the IRS. Why would someone do this? Tax savings.
S-Corp owners can split their income between:
A reasonable salary (subject to payroll taxes)
Distributions (not subject to self-employment tax)
By taking a portion of earnings as distributions, S-Corp owners reduce their self-employment tax liability. However, S-Corps require payroll, bookkeeping, and more paperwork, so it’s only worth it if the tax savings exceed the extra costs.
Why Would a Freelancer Choose S-Corp Taxation?
While most freelancers stick with sole proprietorship or LLC taxation, some benefit from S-Corp status if they:
Earn $60,000+ per year (where tax savings start to outweigh costs)
Want to reduce self-employment taxes
Are comfortable handling payroll and compliance
Final Thoughts
If you’re a freelancer working solo, an LLC is often a smart move for legal protection, but staying taxed as a sole proprietor is usually simplest. If your earnings grow significantly, S-Corp election might be a way to save money—but only if you can handle the extra work.
Always consult a tax professional to see what structure makes sense for your situation!
Need Help Navigating Your Taxes?
Understanding your tax options as a freelancer can be overwhelming, but you don’t have to do it alone. RLS Professional Services specializes in helping self-employed professionals maximize their tax savings while staying compliant. Contact us today for expert guidance tailored to your business needs!
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