Generally, independent contractors, also known as 1099 workers, are considered self-employed and a sole-proprietorship. As such you will be required to pay self-employment taxes. As an independent contractor, you can be sued for your actions or inactions in performing your work. Thus, while a sole proprietorship is the cheapest option, your personal assets may be at risk in the event of a suit. It is advised by some, depending on your situation to incorporate as an independent contractor to a limited liability company (LLC) or an S-corporation.
The main benefit of an LLC is that it is considered a disregarded entity. Meaning the company is disregarded as being separate from the owner. Thus, removing the risk of suitors reaching your personal assets. As an LLC you may also elect how you are taxed, allowing you to avoid double taxation. However, the default tax for an LLC is like a sole-proprietorship in the sense that you pay a self-employed tax on 100% of your income. An LLC is extremely inexpensive to set up.
Incorporating as an S-corporation also removes the risk of suitors reaching your personal assets. An S-corporation reduces your self-employment tax depending on the amount of money you make. Further, in an S-corporation, you are considered an employee and must process payroll. Thus, as an employee in an S-corporation, you are able to pay yourself a salary and take out dividends. The salary is subjected to self-employment tax while the dividends are not, thus reducing your taxes. A little-known fact of S-corporations is that in some states you can even fire yourself and collect unemployment.
All in all, both options are beneficial, and either one is better than leaving your personal assets at risk. An LLC is a cheaper start-up option, while an S-corporation costs more to set up and maintain. However, depending on the amount of income you make, you could save a substantial amount of money in the long run on taxes as an S-corporation.
If you are considering setting up an LLC or S-corporation for your independent contracting business, do not hesitate to contact one of our knowledgeable and experienced attorneys at EPGD Business Law, located in beautiful Coral Gables. Please call us at (786) 837-6787 or email us to schedule a consultation.
*Disclaimer: This blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*