As a freelancer or independent professional, you have a variety of options when it comes to structuring your business. Two popular choices are to operate as an independent contractor or to establish a limited liability company (LLC). Both options provide flexibility and control over your work, but they also come with unique tax implications.
Here’s what you need to know about independent contractor vs LLC taxes in 2018.
Independent Contractor Taxes
If you work as an independent contractor, you are considered a sole proprietor for tax purposes. This means that you will be personally responsible for reporting and paying taxes on your income. You will need to file a Schedule C with your individual tax return, which will list your business expenses and calculate your net income.
The main advantage of operating as an independent contractor is simplicity. You don’t need to file any additional paperwork or pay any special taxes beyond your individual tax return. However, this also means that you are personally liable for any debts or legal issues that arise from your business activities.
It’s important to remember that as an independent contractor, you are responsible for paying both the employer and employee portions of Social Security and Medicare taxes, also known as self-employment taxes. This means that you will need to set aside 15.3% of your income to cover these taxes, in addition to your regular income tax.
If you choose to form an LLC, your business will be treated as a separate legal entity for tax purposes. This means that you will need to file a separate tax return for your business, using Form 1065. However, LLCs are considered “pass-through” entities, which means that the profits and losses of the business are passed through to the owners’ personal tax returns.
This can be advantageous because it allows you to take advantage of certain deductions and credits that are only available to businesses. For example, you may be able to deduct expenses related to running your business, such as equipment, supplies, and marketing costs.
Additionally, LLCs offer limited liability protection, which means that your personal assets are generally protected from lawsuits or other legal issues that arise from your business activities.
However, forming an LLC requires more paperwork and ongoing maintenance than operating as an independent contractor. You will need to register your LLC with your state government, file annual reports, and pay additional fees. Additionally, you may be required to pay state and local taxes beyond your federal income tax.
Which Option Is Right for You?
Ultimately, the decision to operate as an independent contractor or form an LLC depends on your personal circumstances and business goals. Both options have their advantages and disadvantages when it comes to taxes, liability, and paperwork.
If you are just starting out or have a small, low-risk business, operating as an independent contractor may be the simplest and most cost-effective option. However, if you have a larger or more complex business, forming an LLC may provide greater protection and potential tax benefits.
No matter which option you choose, it’s important to consult with a tax professional or attorney to ensure that you are meeting all of your legal and financial obligations. With proper planning and organization, you can minimize your tax burden and set yourself up for success as a freelancer or small business owner.