Advantages and disadvantages of S-Corporations for freelancers

Freelancing is great, whether you’re a sole proprietor or operating a S Corporation or LLC. The flexibility of making your own hours, the freedom of picking and choosing your clients, the joy of paperwork and figuring out your taxes…

Yeah, scratch that last part. That part stinks. And there’s all that S Corp and LLC talk…

So one of the most important things any freelancer needs to figure out is how they are structuring their business. Being a sole proprietor is the easiest option,  but it has its own set of pluses and minuses.

Here’s the scoop (and keep in mind this is for informational purposes only, and here at Almost Millions we 100% recommend talking to a qualified accountant or tax professional):

WHAT IS A SINGLE EMPLOYEE S-CORPORATION, ANYWAY?

A S-Corporation is a specific type of corporation where all profits and losses are passed on directly to the company’s shareholder. Many people start what are called “Single Employee S-Corporations”–legal structures where a corporation only has one employee, typically the freelancer or self-employed person who starts the company.

Unlike other kinds of corporations, S-Corporations avoids double taxation for both the corporation and the shareholder. This is financially beneficial for many freelancers and self employed individuals.

THE GOOD PARTS OF BEING A SINGLE-EMPLOYEE S-CORPORATION

As mentioned above, S-Corporations offer a strong tax situation for many freelancers. Depending on the state you live in, you may or may not pay state taxes and an annual fee for the S-Corporation. But for many freelancers and self-employed individuals–especially those making over $100,000 a year, S-Corporations offer substantial tax savings.

They also offer a great secondary benefit: Legal protection. In case a business transaction goes south and the worst happens and it turns to lawsuits or arbitration, single-employee S-Corporations guarantee a likely legal shield from losing your home or personal possessions.

via GIPHY

THE BAD PARTS OF BEING A SINGLE-EMPLOYEE S-CORPORATION

In many states, S-Corporations have to pay expensive annual fees. In California and New York these fees cost more than $500 each year. For freelancers working part-time or who are making under $50,000, this in itself can make self-incorporation less attractive.

Also, if your freelance job or self-employment position requires significant expenses, that changes things. It may make more sense from a purely monetary standpoint to be an independent contractor. This is something to keep in mind for frequent business travelers or individuals such as photographers or full-stack developers who buy expensive equipment on a regular basis.

And while S-Corporations offer better tax benefits than LLCs, they also require considerably more paperwork. If you’re disorganized, bad at deadlines, or not interested in large amounts of paperwork, a S-Corporation might not be the right choice for you.

SO WHAT TO DO?

Honestly, it comes down to two things. The time you have to devote to administrative tasks and how much money you plan to make.

If you plan to make $25,000 or under yearly as a freelancer, being a sole proprietor is the smart money choice – just make sure to get liability insurance.

If making between $25,000 and $100,000 yearly as a freelancer or as a self-employed professional, it may make sense to incorporate as a single-employee S-Corporation or LLC rather than as a sole proprietor. Talk to your tax professional to see which option benefits you the most. In some states, a LLC might make more sense than a S-Corporation. In other states, the converse is the same. We recommend you speak to atax professional to find the right choice.