You worked hard this year as a freelancer or consultant. You made $100,000 in profit.
You prepared to pay your Income Tax. But then, your accountant handed you a bill for an extra $15,300.
The label says: "Self-Employment Tax."
You are furious. "I already paid income tax! What is this?"
This is the tax penalty for being an LLC or Sole Proprietor.
But there is a "Check the Box" solution called the S-Corp Election that can wipe out a huge chunk of this bill legally.
Disclaimer: This strategy involves complex IRS rules (Form 2553) and affects your QBI Deduction. Consult a CPA to determine your "Reasonable Salary" and specific tax situation.
Freelancers! Stop Paying 15.3% Self-Employment Tax.
1. The 15.3% Problem (FICA Tax)
When you work a W-2 job, your boss pays half of your Social Security and Medicare taxes.
When you are your own boss (LLC/Sole Prop), you pay BOTH halves.
- Social Security: 12.4%
- Medicare: 2.9%
- Total: 15.3%
The Trap: In a standard LLC, 100% of your net profit is subject to this 15.3% tax.
On $100,000 profit, that’s roughly $15,300 gone. Poof.
2. The Solution: "S-Corp Election"
An S-Corp is not a different business structure; it’s a tax status.
By filing IRS Form 2553, you tell the IRS: "Treat my LLC as an S-Corporation for tax purposes."
How It Saves Money
An S-Corp lets you split your income into two buckets:
- Salary (W-2): Subject to 15.3% FICA Tax.
- Distribution (Dividend): NOT Subject to 15.3% FICA Tax.
3. The Math: LLC vs. S-Corp
Let's look at the savings on $100,000 of profit.
| Scenario | Standard LLC | S-Corp Strategy |
|---|---|---|
| Profit | $100,000 | $100,000 |
| Split | All 100% is "Self-Employment Income" | Salary: $40,000 Distribution: $60,000 |
| Taxable for SE Tax? | $100,000 | Only $40,000 |
| SE Tax Bill (15.3%) | $15,300 | $6,120 |
| GROSS SAVINGS | $0 | $9,180 Saved! |
(Note: Savings are gross figures. You must deduct the cost of payroll software and tax filing to find your net benefit.)
4. The Golden Rule: "Reasonable Salary"
You might ask: "Why not pay myself $0 salary and take everything as dividends?"
Stop. That is illegal.
The IRS requires you to pay yourself a "Reasonable Salary" for the work you do.
If you are a software engineer earning $150k, claiming a $10k salary is an audit trigger. The IRS uses industry data to verify this.
The Strategy: Use a payroll service or CPA to determine a defensible salary (often 40-60% of profit depending on your role), and take the rest as distributions.
5. When Should You Switch? (The New Threshold)
S-Corps have administrative costs (Payroll software, Unemployment taxes, and separate Tax Return Form 1120-S).
Due to rising accounting costs in 2025, the "Sweet Spot" to switch is now generally when your Net Profit exceeds $80,000 per year.
Below that, the cost of running the corporation might eat up the tax savings.
Don't Tip the IRS
If you are earning six figures as a freelancer and still operating as a Disregarded Entity (Standard LLC), you are voluntarily overpaying taxes.
Talk to your CPA about filing Form 2553. It’s the single most effective way to keep more of what you earn.
Action Plan:
- Check your Schedule C from last year. Is Line 31 (Net Profit) over $80,000?
- If yes, ask a CPA: "Would an S-Corp election save me money after factoring in payroll costs?"
- File Form 2553 (Deadline is usually March 15th for the current tax year, or within 75 days of forming the LLC).
Helpful Resources:
IRS.gov: S Corporations Explained
Collective: S-Corp Tax Savings Calculator
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