S-corp vs LLC: what US freelancers need to decide

Most US freelancers start as sole proprietors. No entity, just report income on Schedule C. As earnings grow, the question comes up: should I form an LLC? Should I elect S-corp status? The answer depends on your income, your state, and how much admin you want to handle.

LLC: simple and flexible

An LLC gives you liability protection. Your personal assets are separate from business debts. For tax, a single-member LLC is a disregarded entity: you still report on Schedule C. No change to how you file. You form the LLC for the legal shield, not for tax savings.

S-corp: the self-employment tax break

When you elect S-corp status, you become an employee of your own company. You pay yourself a reasonable salary (subject to payroll tax) and take the rest as distributions (not subject to self-employment tax). The savings come from avoiding 15.3% on the distribution portion.

When S-corp makes sense

• You earn enough that the tax savings exceed the cost of payroll and compliance
• Rough rule of thumb: net profit over $80,000 is when people start looking
• You are willing to run payroll, file payroll tax returns, and keep corporate records
• Your state does not impose a high franchise or LLC fee that eats the savings

The compliance cost

S-corps require payroll. You need a payroll provider or accountant. You file a separate corporate return (1120-S). You have more paperwork, more deadlines, and more to get wrong. For a freelancer earning $50,000, the compliance cost often outweighs the tax benefit.

“Switched to S-corp when I hit $95k. Save about $4,000 a year in self-employment tax. Payroll and accounting cost me $1,500. Net win, but only because I crossed the threshold.”

- r/freelance

State differences

California charges an $800 minimum franchise tax on S-corps. New York has different rules. Texas has no income tax but still has franchise tax for entities above a certain size. Your state can change the math. Run the numbers with a local CPA before you elect.