Freelancer Tax vs. S-Corp: When Does the Switch Pay Off?
As a freelancer (sole proprietor or single-member LLC), you pay self-employment tax on 92.35% of your net income โ a flat 15.3% that covers both halves of Social Security and Medicare. That's on top of your regular income tax. At higher income levels, this adds up fast.
An S-Corp structure lets you split income into salary (subject to FICA) and distributions (not subject to self-employment tax). The savings come from the portion of profit you take as a distribution rather than wages. The IRS requires you to pay yourself a "reasonable salary" โ typically 60-70% of your net business income.
The break-even point is usually around $50,000-$80,000 in net annual income, where the SE tax savings start to outweigh the cost of payroll and accounting services (typically $1,500-$3,000/year). Below that threshold, the added complexity isn't worth it.
This is a simplified illustration โ income tax rate varies significantly by bracket and deductions. Consult a CPA before electing S-Corp status to get personalized numbers.
Frequently Asked Questions
You can elect S-Corp status as either a corporation or an LLC. An LLC taxed as an S-Corp (via Form 2553 election) is the most common structure for freelancers, as it keeps the legal simplicity of an LLC while gaining the payroll tax advantages of an S-Corp.
The IRS requires a salary comparable to what you'd pay another employee to do your work. For most knowledge workers, this is 60-75% of net business income. Setting your salary too low is a common audit trigger. A CPA can help you determine a defensible salary for your industry.