When working as a contractor, is it better to work as a 1099 contractor or rather incorporate as a C, S or LLC corporation? (with one employee/owner/board member)

(assuming that the pay is the same and to the customer it's no difference)


6 Answers 6


It makes no difference for tax purposes.

If you are 1099, you will pay the same amount of taxes as if you formed a corporation and then paid yourself (essentially you are doing this as a 1099 contractor, just not formally).

Legally, I don't know the answer. I would assume you have some legal protections by forming an LLC but practically I think this won't make any difference if you get sued.

  • What about expenses, isn't it easier with corporations?
    – Yona
    Mar 17, 2011 at 18:58
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    I thought if you form Subchapter S Corp, then part of the profit can be passed through the company at rate lower than your personal income tax rate.
    – Vitalik
    Mar 17, 2011 at 19:46
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    Let me just say this: If there were a trick that you could do to get out of paying taxes or pay much lower taxes, it's likely that everyone would be doing that and they would close the loophole OR everyone would just do it that way because it was so obvious. Mar 17, 2011 at 20:21
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    S Corporations are exempt from corporate taxes. so double taxation doesn't apply. According to this article you can lower your Fica and self-employment taxes: guideye.com/Scorporation I guess it all depends on what the real numbers and rates are. And i don't know about "everyone" but most of IT contractors incorporate for whatever reasons.
    – Vitalik
    Mar 17, 2011 at 23:06
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    call me crazy arguing with CFO of stackoverflow. Here is another link: scorporationsexplained.com/… It says right there "As compared to a sole proprietor, partner or C corporation employee making $200,000, therefore, the S corporation saves its owner $10,500 a year.". Argue with that guy, not me.
    – Vitalik
    Mar 18, 2011 at 3:36

I'll just re-post my comment as an answer as i disagree with Michael Pryor. According to this article (and few others) you may save money by incorporating.

These factors don’t change the general payroll tax advantage of an S corporation, however: A S corporation can often save business owners substantial amounts of payroll tax if the business profit greatly exceeds what the business needs to pay owners for their work.

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    This seems so sketchy to me. Anyone making over say 50k should just incorporate as an S corp and claim the additional income as non-payroll income? The IRS would love that audit. Mar 18, 2011 at 14:37
  • @MichaelPryor - it can be sketchy, but it's definitely true since S-Corp owners do not pay FICA taxes on distributions, only fed+state taxes. The IRS has very specific rules about first paying a reasonable salary before distributions. They have won cases against owners who take a salary of 15K and distributions of 200K simply to avoid payroll taxes. Note that there is a point at which it is less "sketchy". Once the salary exceeds the SS max, only Medicare tax remains which is a much smaller amount to avoid paying in this manner.
    – TTT
    Mar 29, 2017 at 19:11
  • I've heard 50/50 is reasonable. But don't quote me if you get audited.
    – Vitalik
    Mar 30, 2017 at 19:53

Unless the amounts involved are very small, it is MUCH better to incorporate.

First, incorporation gives you limited liability for your acts as an employee. As an individual, you have unlimited liability.

Second, incorporating allows you to deduct (for tax purposes) the costs of doing business, including all of your health insurance, most transportation, and some meals.

The exception to the rule is if the amounts you are earning are so small that they don't cover the cost of incorporating, accounting fees, etc. (a few hundred, or at most a few thousand dollars).


If you start an LLC with you as the sole member it will be considered a disregarded entity. This basically means that you have the protection of being a company, but all your revenues will go on your personal tax return and be taxed at whatever rate your personal rate calculates to based on your situation. Now here is the good stuff. If you file Form 2553 you can change your sole member LLC to file as an S Corp. Once you have done this it changes the game on how you can pay out what your company makes. You will need to employ yourself and give a "reasonable" salary. This will be reported to the IRS and you will file your normal tax returns and they will be taxed based on your situation. Now as the sole member you can then pay yourself "distribution to share holders" from your account and this money is not subject to normal fica and social security tax (check with your tax guy) and MAKE SURE to document correctly. The other thing is that on that same form you can elect to have a different fiscal year than the standard calendar IRS tax year. This means that you could then take part of profits in one tax year and part in another so that you don't bump yourself into another tax bracket. Example: You cut a deal and the company makes 100,000 in profit that you want to take as a distribution. If you wrote yourself a check for all of it then it could put you into another tax bracket. If your fiscal year were to end say on sept 30 and you cut the deal before that date then you could write say 50,000 this year and then on jan 1 write the other check.


There is some benefit to creating a corporation or LLC -- you theoretically have a liability shield. As Michael Pryor points out in his answer, though, there will probably be little difference if you get sued.

Operating the corporation or LLC incurs some extra costs: you have to pay annual fees to the state, and there's a bit of extra administrative overhead (very little overhead for an LLC though).


I am surprised no one has mentioned the two biggest things (in my opinion). Or I should say, the two biggest things to me. First, 1099 have to file quarterly self employment taxes. I do not know for certain but I have heard that often times you will end up paying more this way then even a W-2 employees. Second, an LLC allows you to deduct business expenses off the top prior to determining what you pay in taxes as pass-through income. With 1099 you pay the same taxes regardless of your business expenses unless they are specifically allowed as a 1099 contractor (which most are not I believe). So what you should really do is figure out the expense you incur as a result of doing your business and check with an accountant to see if those expenses would be deductible in an LLC and if it offsets a decent amount of your income to see if it would be worth it. But I have read a lot of books and listened to a lot of interviews about wealthy people and most deal in companies not contracts. Most would open a new business and add clients rather than dealing in 1099 contracts. Just my two cents... Good luck and much prosperity.

  • I'm pretty sure a sole-proprieter and an LLC with one member have the same tax treatment - the difference is in liability protection as the other answers have stated,
    – D Stanley
    Mar 29, 2017 at 18:39
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    This answer conflates and confuses so many things...
    – quid
    Mar 29, 2017 at 18:40

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