S Corp for Contractors

An S-corp isn't a separate business structure like an LLC — it's a tax election an LLC or corporation can make with the IRS. The main appeal for contractors is self-employment tax savings: as a sole proprietor or default LLC, all your net profit is subject to self-employment tax. With an S-corp election, you pay yourself a 'reasonable salary' (subject to payroll tax) and can take remaining profit as a distribution, which isn't subject to self-employment tax.

S-corp status adds real costs: payroll processing, a separate business tax return, and more formal bookkeeping. It generally only pays off once net profit is comfortably above roughly $60,000-$80,000 a year, because below that the self-employment tax savings often don't outweigh the added accounting and payroll costs. Below that threshold, staying an LLC taxed as a sole proprietor or partnership is usually simpler and cheaper.

The IRS requires the salary portion to reflect what you'd actually pay someone to do your job, not an artificially low number designed purely to dodge payroll tax. Set it too low and you risk a costly audit and back-tax bill. Work through the actual numbers with an accountant before electing — this is one of the few tax decisions where the wrong call is expensive to unwind.