An S-Corp election is a tax status that can be elected by certain types of corporations in the United States. The election allows a corporation to be taxed like a partnership or sole proprietorship, meaning that the profits and losses of the corporation are passed through to the shareholders’ personal tax returns and taxed at their individual tax rates, rather than being taxed at the corporate level.
Freelancers who operate as a corporation, such as an LLC, may want to consider making an S-Corp election if they meet certain criteria. By making the S-Corp election, the freelancer may be able to save money on self-employment taxes, which can be a significant expense for self-employed individuals.
When a freelancer operates as a sole proprietor or as a single-member LLC, they are subject to paying self-employment taxes, which include both the employer and employee portions of Social Security and Medicare taxes. However, if the freelancer makes an S-Corp election, they can pay themselves a reasonable salary and then take any additional profits as distributions, which are not subject to self-employment taxes.
It’s important to note that not all freelancers will benefit from making an S-Corp election, as it may not be cost-effective for those who earn a lower income or have significant expenses. Additionally, making the S-Corp election involves additional paperwork and ongoing requirements, such as maintaining corporate formalities and filing an annual tax return.