Whether you’re an accountant, a yoga instructor, or an Uber driver, it’s important to think about how your business is legally structured.
Your business structure will affect how you’re taxed and how much you’ll owe the IRS and your state government each year. It can also affect how you document your finances and could even be relevant if you ever, say, were sued by a client.
These are four popular self-employed tax categories:
Each classification comes with different benefits as you’ll see below.
|Individual contractor||No tax withholding when you get paid; extensive tax deductions|
|Sole proprietor||Separate business and personal income; many tax deductions allowed|
|LLC||Creates a buffer between business and personal assets, providing some financial protection|
|S Corporation||Gives businesses with 100 or fewer employees the tax benefits of being a corporation but lets owners be taxed as individuals|
You don’t have to file any special paperwork to be treated as an individual contractor or a sole proprietor.
Setting up an LLC or S corporation, by contrast, requires a little more effort and overhead. And you may need to work with a tax professional to make sure everything is above board. But creating a formal business entity has the benefit of separating your business assets from your personal ones. That can provide important financial protection if you ever get sued.
Establishing an LLC or filing as an S corporation can provide some legal and tax benefits. But it’s not the right move for everyone. Here are some points to consider:
|Potential tax benefits||Requires time and money to set up|
|Flexibility in how you pay yourself||Stricter documentation requirements|
|Separate business and personal assets||May have to file additional reports or obtain licenses from the state each year|
While it’s always a good idea to keep your business income account separate from your personal finances, it’s especially important when you’ve established an LLC, a sole proprietorship, or an S corporation.
If that seems like a ton of work, don’t panic—you can always hire an accounting service to help you out. But again, that requires money and mental overhead, so you may only want to go this route if you’re committed to building a business.