I make about $70,000 a year working as a contractor. Currently, I operate as a sole proprietorship. I invoice my clients using my personal name (I don't even have a business name), and they pay me via checks that I put into my personal bank account.

At tax season, my clients send out 1099-MISC forms, with their payments to me recorded in box 7. I report the income on a schedule C when I file my taxes.

My question is this: Would I be likely to see tax savings if I formed an LLC and invoiced my clients through the LLC instead of having a sole proprietorship?

If my understanding of the new United States tax law is correct, I would, because my LLC would be taxed at 21 percent. Under my current sole proprietorship, income from my contract work is taxed at the personal rate, and most of my income falls into high tax brackets (particularly because the ~$70k I make per year in contract work is in addition to W-2 income from a full-time job).

I'd be grateful for clarification on this. I'm trying to wrap my head around the new tax law and what it means for LLCs. (I'm wondering if an LLC is not enough, and I'd instead need to form an S-Corp or something to take advantage of the lower tax rate for business.) It's very confusing.

1 Answer 1


The new tax law provides a 20% deduction for income from pass-through entities (for next 8 years). So whether you keep operating as a sole-proprietor or establish an LLC,partnership, etc. you'll benefit from this provision, it just means that less of your income is subjected to taxation, but what is subjected to taxes will still be done at the normal rates.

The new tax law lowered corporate tax rates, but the individuals who get paid by corporations still pay personal income tax at the normal personal income tax rates.

There is not an incentive to change your business classification caused by the new tax law unless you hire sub-contractors, in some cases the new law does provide incentive to turn contractors into employees.

Though there may be no incentive introduced by the new tax law, you could save some by forming an LLC and electing S-Corp status. It's still a pass-through entity, but you can potentially save some tax by dividing (not evenly) your income between salary and distributions from the S-Corp, which you cannot do with a sole-proprietorship. The distributions are not subject to self-employment tax, which can create significant savings. However, the IRS requires reasonable salary be paid prior to distributions, so it's only a portion of your income that you can shield from self-employment tax, and you'd still have payroll taxes on the salary portion. You'd want to consult an accountant to get a thorough answer.

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