Why I Chose an S Corp as a Freelancer (And What I've Learned So Far)
aka why you still need to budget for taxes, you optimistic entrepreneur, you.
About one-third of all my freelance income. That’s how much I was advised to set aside for taxes when I first started freelancing.
That’s a decent chunk of change, just vanishing into the self-employment tax void.
After coughing up an eye-watering amount of my revenue to taxes in my first year of freelancing, I knew something had to change. That's when I started seriously looking into S Corps — and honestly, I wish I'd done it sooner.
But let's back up. If you're like me, the thought of incorporating your business sounds about as fun as debugging a website in Wordpress. Yaaaaaaay.
Trust me, though: This is one business decision that's worth pushing through the temporary headache, if it makes sense for you.
Why I Started Considering an S Corp
When I first started freelancing, a sole proprietorship seemed like the easiest route. No complicated paperwork, no separate business entity—just me, my laptop, and my clients. But as my business grew, so did my tax bill.
The moment I realized my freelancing had become a real business was when I invoiced over $10k in one month. Then I did it again. Suddenly, I wasn't just a freelancer—I was running a legitimate business that needed legitimate protection. And I was still paying 15.3% in self-employment taxes on every single dollar I earned.
That's when my colleague Anna Burgess Yang (bless her patient soul) sat me down and explained how an S Corp could help me keep more of my money while protecting my personal assets. It was a choice that she’d made, and one that could work for me too, she said.
Spoiler alert: She was right.
What is an S Corp?
According to the IRS, an S Corp (short for S Corporation) is a corporation that passes corporate income, losses, deductions, and credits through to its shareholders (that’s me!) for federal tax purposes. Unlike a traditional corporation, an S Corp doesn't pay federal corporate taxes. Instead, the company's profits and losses are reported on the owner's personal tax return.
Pros and Cons of an S Corp
Pros:
- Tax Savings: As an S Corp, you can split your income between a reasonable salary and distributions, hopefully reducing your self-employment tax liability.
- Liability Protection: Your personal assets are more protected compared to a sole proprietorship.
- Professionalism: Having an S Corp (or other company, like an LLC) can make your business look more legitimate to clients.
Cons:
- Administrative Burden: More paperwork, including setting up payroll and filing a bunch of different tax forms.
- Quarterly Taxes: You still have to pay quarterly estimated taxes on distributions. I’m an idiot and didn’t realize I had to do this this year. Don’t be like me.
- Reasonable Salary Requirement: You have to pay yourself a “reasonable” salary, which can be tricky to figure out.
- Operational Costs: I had to start paying for Gusto and QuickBooks when I started my S Corp, as well as making sure I had enough to cover payroll runs twice a month. Some months cut it nail-bitingly close with the timing of my payments from clients. Not great for the weak of heart (read: me). I also have to pay for tax software this year to do my 1120S form, because you literally cannot file it by yourself. (At least, it’s strongly advised against doing so.)
S Corp vs LLC vs Sole Proprietor: Breaking It Down
There’s three main ways to freelance: as a sole proprietor, an LLC, or an S Corp. Here’s how they stack up:
The S Corp Process: Without Legal Jargon
Here's what the process looked like for me (minus the legal mumbo-jumbo):
- First, I formed an LLC (state level) — Hsing Tseng Creative LLC
- Applied for an EIN (federal level)
- Filed a Statement of Conversion with the State of Colorado to convert my LLC to an S Corp — Hsing Tseng Creative
- Filed Form 2553 with the IRS to elect S Corp status (this form almost broke me)
- Set up payroll with Gusto and registered with, like, five different agencies in Colorado
- Updated my business bank account (I bank with Novo) information to reflect my S Corp status
- Started a fresh account in QuickBooks to get my accounting sorted for good
- Re-signed contracts and filed new W-9s with all my clients
- Updated my invoice information
- Started tracking everything obsessively
Phew.
I’m not going to lie: It was a total pain in the ass.
The Good, The Bad, and The "Why Didn't Anyone Tell Me This?"
The Good
- I'm saving roughly 30% on self-employment taxes
- My personal assets are protected if something goes wrong
- I feel like a legitimate business owner (imposter syndrome, begone!)
The Bad
- Payroll is a whole thing and it stresses me out some months
- Much more paperwork than I expected
- Higher accounting fees
- Wtf is a reasonable salary? IRS says, tee-hee, take your best guess! 🤪
The "Why Didn't Anyone Tell Me This?"
Remember when I mentioned quarterly taxes? Here's the thing: You still need to pay them on your distributions. You also have to remember to save from all your 1099 work done as an LLC/sole proprietor before switching to an S-Corp if you switch mid-year. I learned this the hard way and ended up with a surprise tax bill this tax season that’s going to have me scrounging to pay it by April 15 — or in debt to the IRS for a while.
Don't be like me — set aside money for taxes from both your salary AND distributions.
What I Wish I'd Known Before Making the Switch
- You need consistent income to make it worth it. The general rule I’ve heard is $40k+ in profit, but I feel like that’s pretty high. I made it work with $20k in profit this year after payroll and business expenses, and still saved significantly on my taxes. This S Corp calculator from Gusto was critical in helping me figure out that switching would be worth it for me!
- Setting a reasonable salary is crucial. Too low, and the IRS gets suspicious. Too high, and you lose the tax benefits. I've heard that 60% salary, 40% distributions is a good rule of thumb, but I’d suggest you work with an accountant to find your sweet spot. I did not 🙃 and literally just winged it by paying myself what I used to earn at my agency job.
- The learning curve is steep. Between payroll, tax planning, and compliance requirements, there's a lot to manage. Budget for professional help, or plan to suffer and do a lot of research.
- Timing matters. Making the switch mid-year can complicate your taxes more than necessary. Plan for a January 1 start date if possible. I converted to an S Corp on April 21, 2024 and it screwed up my taxes quite a bit.
Is an S Corp Right for You?
Consider making the switch if:
- You're consistently making a profit from your freelancing
- You're ready for more administrative responsibilities
- You want to save on self-employment taxes
- You're thinking long-term about your business
- You want the legal protection of being a company, not a sole proprietor
Skip it if:
- Your income is too irregular
- You're not ready for the administrative overhead
- You need flexibility in how you pay yourself
- You're still in the early stages of your business
The Bottom Line
Switching to an S Corp has been one of the best decisions I've made for my business, despite the learning curve and occasional headaches. Yes, there are more moving parts to manage, but the tax savings and liability protection make it worthwhile.
Remember: This is about setting your business up for long-term success. If you're a US-based freelancer ready to level up from side hustle to serious business, an S Corp might be your next step.
Or, consider taking a more baby step and operating as an LLC if you want a mixture of flexibility in how you pay yourself and legal protection of your personal assets. Sometimes, on those tight payroll months, I wonder if an LLC would’ve made more sense for me.
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Just… do yourself a favor and work with a good accountant from the start. Your future self (and bank account) will thank you.
Disclaimer: This post reflects my personal experience and shouldn't be taken as legal or tax advice. Please consult with qualified professionals before making decisions about your business structure.
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