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 being able to pick and choose 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 exactly they’ll structure 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 SOLE PROPRIETOR, ANYWAY?
When you run your own business as either a full-time freelancer or self-employed person, or someone with a side gig, you can either be a sole proprietor or incorporate as a single-employee corporation.
A sole proprietor is the easiest option: It means you report income from your freelance gigs or self-employed business on your own personal tax return.
Is it a good idea?
THE GOOD PARTS OF BEING A SOLE PROPRIETOR
One of the best parts of being a sole proprietor is that it requires a lot less paperwork and administrative time than running a corporation. Sole proprietors don’t have to spend as much time filing paperwork for the IRS and state business reporting entities, which is nice.
It’s also cheaper to be a sole proprietor if you make less than $100,000 a year from your freelance business in many cases. Although the specifics vary on the state you’re based in and the kind of work you do, the fees to incorporate add up. Read more in our posts about Pluses And Minuses Of A Single-Employee S Corporation, and Pluses And Minuses Of A Single-Employee LLC.
There are also tax benefits to being a sole proprietor. Expenses such as work-related travel, office supplies, electronics used for work purposes, and work-related meals can be deducted from your personal taxes. In many cases, this can reduce your tax burden considerably.
THE BAD PARTS OF BEING A SOLE PROPRIETOR
Double taxation stinks. It’s a rude surprise for a lot of first-time freelancers when they’re doing their taxes and find out that their earnings have a lot more taken out for taxes than their full-time or part-time income is.
When you run a one-person freelance operation, you have to pay self-employment taxes on your earnings out of pocket instead of having your employer pay for things like social security in payroll.
Adding insult to injury, sole proprietorship earnings are subject to a 13.3 percent self-employment tax which is higher than the tax rate your employer pays in many cases.
Being a sole proprietor is also tough when it comes to legal liability. If the worst happens and you encounter a lawsuit or are out of work, your personal assets can be lost if your business goes under. That’s why liability insurance and disability insurance are highly recommended for any sole proprietor – life has a knack at throwing the unexpected your way.
SO WHAT TO DO?
Honestly, it all comes down to 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.
And if you make more than $100,000 yearly as a freelancer and are a sole proprietor, you’re exposing yourself to a world of unnecessary tax liability. Do the smart thing and incorporate.