Freelancers: Sole proprietorship vs LLC vs S Corp?

almost 4 years ago from Oz Chen, UX Designer. Writer & Publisher @ UXBeginner.com

  • Chris YorkChris York, almost 4 years ago

    It depends on a few things, like how much money you make, if you have partners, what you plan to do with the business in the future (e.g. raising VC money), etc.

    But hypothetically, let's say you're a one-person shop and are making good money—an LLC electing to be taxed as an S-corp is may be the best fit for you.

    This adds very minimal complexity to your taxes (especially compared to an S-corp) and will likely save you a lot of money through avoidance of self-employment tax. For example, if you make $150,000 as a freelance designer and are a sole proprietor, you'd pay a ~15.3% tax on that income. If you had an S-corp or LLC with S-corp election, you could pay yourself, say $70k (or whatever is a reasonable salary for your location/services/experience) and claim the rest as a dividend. You would not pay the self-employment tax on the dividend, which would save you over $12k. The total cost of this would be a couple hundred a year to an accountant and/or tax attorney, which are write offs, and to the state for fees. In most states, the setup cost will be a few hundred dollars (California is particularly nasty and it's around $800 to set up and the same annually going forward; most states are $100-400).

    One specific note here: to do this correctly, you need to pay yourself a salary through some kind of payroll software, like Gusto ($45/mo).

    3 points