Why I Switched from 1099 to S-Corp (and You Should Too)

Note: This article contains legal advice. We recommend you consult a lawyer before making legal decisions in your business.

Picture this: It’s 2017, and I’ve just been laid off. Instead of panicking, I decided to take my side hustle full-time. Little did I know, this leap would lead me to a golden opportunity that’d save me thousands in taxes and supercharge my business growth.

Enter the S-Corp—my secret weapon in the freelance world.

Now, I know what you’re thinking. “S-Corp? Sounds like it’s just for big companies?” That’s what I thought too. But let me tell you, it’s been a total game-changer. We’re talking tens of thousands of dollars saved on taxes every year. And the best part? It’s totally legit.

If you’re pulling in around $80K-$100K+ a year from your freelance gig and you’re tired of taxes taking a massive bite out of your hard-earned cash, stick around. This might just be the most profitable article you read all year.

Ready to revolutionize your freelance business? Let’s dive in!

My Freelance Beginnings

Let’s rewind a bit.

When I got laid off in 2017, I had a choice: hunt for another 9-to-5 gig or go all-in on my side hustle. I chose the latter, and boy, was it a rollercoaster ride at first.

Continuing as as a 1099 contractor seemed like the obvious move. It was simple, straightforward, and got me up and running fast. I was living the dream—setting my own hours, and being my own boss.

But here’s the thing: as my business grew, so did my headaches.

Taxes? A nightmare.
Legal protection? Practically non-existent.

I was doing well, pulling in close to six figures, but it felt like I was on a financial treadmill. The more I earned, the more taxes I paid, and the harder it became to grow my business.

That’s when I knew something had to change. I needed a way to keep more of my hard-earned cash, protect myself legally, and be taken more seriously by bigger clients.

Little did I know, the answer was waiting for me: LLC with an S-Corp election.

Discovering the S-Corp Solution

So there I was, hustling as a 1099 contractor, when I stumbled upon this company called Collective. These folks reached out and dropped a knowledge bomb on me – I could potentially save tens of thousands on taxes by switching to an S-Corp.

At first, I was skeptical. It sounded too good to be true. But as they explained the concept of a “pass-through entity,” things started to click.

Here’s the deal in simple terms:

• As a 1099 contractor, I was paying taxes twice – once for my business and once for my personal income.
• With an S-Corp, the business itself doesn’t pay taxes. Instead, the profits “pass through” to me as the owner.
• This means I only pay taxes once, on my personal income. Ka-ching!

But the benefits didn’t stop at taxes. An S-Corp also offered better legal protection. Instead of my personal assets being on the line if something went south, only the business assets would be at risk.

Of course, I didn’t just take Collective’s word for it. I’ve got a brother who’s a CPA (handy, right?), so I ran the idea by him. His verdict? Given my revenue – which was knocking on the door of $100K – making the switch made sense.

Still, I had questions. Would it be worth the hassle? Could I handle the extra paperwork? What about the costs involved in making the switch?

In the end, the potential benefits far outweighed my concerns. I decided to take the plunge and convert my business to an LLC with an S-Corp election.

Spoiler alert: It turned out to be one of the best business decisions I’ve ever made.

Making the Switch: From 1099 to S-Corp

Alright, so I’d made the decision to switch. But how did it actually work in practice? Let me break it down for you.

First things first, I had to set up an LLC and then elect for S-Corp taxation. Luckily, Collective handled all the paperwork and filings, making the process surprisingly painless.

Here’s what changed:

Payroll

I became an employee of my own company. Weird, but cool. I now pay myself a “reasonable salary” through payroll.

Taxes

Instead of paying self-employment tax on all my income, I only pay it on my salary. The rest? I can take as distributions, which aren’t subject to that hefty 15.3% self-employment tax.

Bookkeeping

I had to up my game here. Keeping business and personal finances separate became crucial.

Perception

When I send invoices or W-9 forms now, it’s under my business name. Clients started seeing me as a “real” business, not just a freelancer.

The impact was almost immediate. In the first year alone, I saved about $8,000 in taxes. That’s a nice chunk of change to reinvest in my business or, let’s be honest, treat myself to a well-deserved vacation.

But it wasn’t just about the money. I felt more legitimate. When I landed bigger clients, I had the confidence of knowing I was protected legally if things went wrong.

Sure, there were some learning curves. Figuring out payroll was a bit of a headache at first. But tools like Gusto made it manageable. And yes, there were some upfront costs and ongoing expenses for things like bookkeeping and tax prep. But the savings and benefits far outweighed these costs.

The bottom line? Within months, I went from stressing about taxes to actually looking forward to tax season. (Okay, “looking forward” might be a stretch, but you get the idea.)

The Long-Term Payoff: Why I’m Sticking with S-Corp

It’s been a few years since I made the switch, and I can confidently say that becoming an S-Corp was a game-changer for my business.

Let me break down the long-term benefits I’ve experienced:

Consistent Tax Savings:

Remember that $8,000 I saved in the first year? Well, that was just the beginning. I’ve consistently saved between $8,000 to $10,000 annually on taxes. That’s money I’ve been able to plow back into growing my business, upgrading my skills, and yes, improving my quality of life.

Easier Scaling:

As an S-Corp, I’ve found it easier to scale my business. I can bring on contractors or even employees without the legal headaches I might have faced as a sole proprietor. This structure has given me the flexibility to grow beyond just myself.

Improved Client Relationships:

There’s something about being a “real business” that makes clients take you more seriously. I’ve been able to land bigger contracts and negotiate better terms. Clients see me as a business owner, not just a freelancer for hire.

Better Work-Life Balance

This might sound odd, but being an S-Corp has actually improved my work-life balance. How? Well, the tax savings have given me more financial breathing room. I can take time off without stressing about every billable hour I’m missing.

Future-Proofing

Whether I decide to keep growing my business or eventually sell it, the S-Corp structure puts me in a better position. It’s easier to value and transfer an established business entity than a sole proprietorship.

Peace of Mind

There’s an intangible benefit to knowing my personal assets are protected. It’s allowed me to take calculated risks in my business without putting my personal finances on the line.

Now, I won’t sugarcoat it – there are ongoing responsibilities. I have to run payroll, keep meticulous records, and there are some additional costs for tax preparation and bookkeeping. But for me, the benefits far outweigh these minor inconveniences.

The bottom line? Years later, I’m still convinced that switching to an S-Corp was one of the best business decisions I’ve ever made. It’s allowed me to build a more profitable, scalable, and professional business than I ever could have as a 1099 contractor.

My Advice for Freelancers Considering the Switch

Thinking about making the leap to an S-Corp? Here’s my two cents based on my experience:

Mind Your Revenue

If you’re not consistently earning around $80,000 to $100,000 per year, the switch might not be worth it yet. The tax savings really kick in at higher income levels.

Consider the Long Game

Don’t just think about this year’s taxes. Consider your growth plans. If you’re on an upward trajectory, setting up an S-Corp now could save you headaches later.

Get Professional Help

Yes, it costs money, but having experts like Collective handle the setup and ongoing compliance is worth every penny. They’ll catch things you might miss and save you from costly mistakes.

Separate Your Finances

Open a business checking account ASAP. Keeping your business and personal finances separate is crucial for tax purposes and your sanity.

Understand Your New Responsibilities

As an S-Corp owner, you’ll need to run payroll, file additional tax forms, and keep more detailed records. Make sure you’re ready for this commitment.

Don’t Skimp on Your Salary

It’s tempting to set a super low salary to maximize your tax savings, but the IRS frowns on this. Work with your accountant to set a reasonable salary for your role.

Leverage Your New Status

Once you’re an S-Corp, use it to your advantage. Mention it in proposals, on your website, and in client communications. It can give you a professional edge.

Remember, this isn’t a one-size-fits-all solution. It worked wonders for me, but make sure to consider your unique situation before making the switch.

Busting S-Corp Myths: What You Need to Know

There’s a lot of misinformation out there about S-Corps. Let’s clear up some common misconceptions:

Myth 1: “S-Corps are only for big businesses.”

Reality: Not true! S-Corps can be great for solo entrepreneurs and small businesses. It’s more about your income level and growth plans than your size.

Myth 2: “Switching to an S-Corp is a tax loophole.”

Reality: S-Corps are a completely legal and IRS-approved way to structure your business. It’s not about evading taxes, but optimizing your tax strategy within the law.

Myth 3: “You need to hire employees to be an S-Corp.”

Reality: Nope! You can be an S-Corp with just yourself as the only employee. That’s exactly what I did.

Myth 4: “S-Corps are super complicated to run.”

Reality: There are additional responsibilities, sure. But with the right tools and professional help, it’s manageable. The benefits often outweigh the extra work.

Myth 5: “You can’t take money out of your business as an S-Corp.”

Reality: You absolutely can! You pay yourself a salary, and you can also take distributions from your profits.

Myth 6: “Once you’re an S-Corp, you’re stuck with it forever.”

Reality: While there can be tax implications, you can change your business structure if needed. It’s not a life sentence.

Myth 7: “S-Corps are expensive to set up and maintain.”

Reality: There are costs involved, but for many businesses, the tax savings more than make up for these expenses.

Understanding these realities helped me make an informed decision. Don’t let myths hold you back from exploring whether an S-Corp could benefit your business.

My Experience with Collective: More Than Just S-Corp Setup

When I first considered switching to an S-Corp, Collective wasn’t just helpful—they were a game-changer. Here’s why I’m still with them years later:

Seamless Setup

They handled all the paperwork and filings to get my S-Corp up and running. No headaches, no confusion—just done.

Ongoing Support

Collective isn’t a “set it and forget it” service. They’ve been there for every question and concern I’ve had along the way.

Comprehensive Services

Beyond just S-Corp formation, they handle my bookkeeping and tax prep. It’s like having a CFO and tax expert on call.

Time Savings

Before Collective, I spent hours each month on bookkeeping and dreaded tax season. Now? It’s all handled, giving me more time to focus on actually running my business.

Peace of Mind

Knowing that professionals are handling my finances and keeping me compliant gives me one less thing to worry about.

Education

They don’t just do the work—they help me understand it. Their resources have made me a more financially savvy business owner.

Cost-Effective

When I add up the time saved and potential mistakes avoided, Collective has more than paid for itself.

Is Collective the only option out there? No. But for me, they’ve been an invaluable partner in my S-Corp journey. If you’re considering making the switch, I can’t recommend them enough.

Remember, though, this is a big decision. Do your research, consider your options, and choose the path that’s right for your unique situation.

Wrapping Up: Is an S-Corp Right for You?

So, there you have it—my journey from stressed-out 1099 contractor to confident S-Corp owner. It’s been a game-changer for my business, my finances, and honestly, my peace of mind.

Let’s recap the big wins:

• Significant tax savings (we’re talking thousands each year)
• Better legal protection for my personal assets
• Improved credibility with clients
• Easier path to scaling my business
• More strategic approach to my finances

But here’s the thing: while switching to an S-Corp was the right move for me, it might not be for everyone. It’s not a magic bullet, and it does come with responsibilities and costs.

So, ask yourself:

1. Is your business consistently earning around $80,000 to $100,000 or more annually?
2. Are you ready to take on more administrative tasks (or outsource them)?
3. Do you have plans to grow your business beyond just yourself?
4. Are you looking for ways to optimize your tax strategy legally?

If you answered yes to most of these, it might be time to seriously consider making the switch.

My advice? Don’t rush into it, but don’t dismiss it either. Talk to a professional, crunch the numbers, and think about your long-term business goals.

For me, becoming an S-Corp was one of the best business decisions I’ve ever made. It’s allowed me to build a more profitable, scalable, and professional business than I ever could have as a 1099 contractor.

Who knows? Maybe a year from now, you’ll be writing your own “Why I Switched to an S-Corp” story. If you do, I’d love to hear about it!

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