Independent Contractor vs. LLC: Which Is Better for Avoiding Taxes?

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Find out the benefits of LLC for independent contractors, sole proprietors, and gig workers

Small business owners and 1099 contractors will tell you there is nothing like the personal freedom you find working for yourself. Whether you launch a business that utilizes your unique talents, or you work with an established company, such as becoming an Uber driver or Instacart shopper, a side hustle provides flexibility and extra cash that can improve your personal finances.

But when tax time rolls around, being an independent contractor can cause added stress. What are you allowed to write off as business deductions? Did you pay enough in quarterly estimated taxes that you won’t have a big tax bill? And why is self-employment tax so expensive?

Unprecedented Growth In Gig Economy

Even with these challenges, the gig economy continues to grow in 2024. Recent research from DollarSprout shows that roughly 70% of Americans work some sort of gig or side hustle, with 12% of those people earning an extra $1,000 per month or more.

That’s not a small amount of cash. For many people, that extra money can cover rent, groceries, or other expenses. But if you don’t know how to manage your taxes like a business person, you can see that money vanish with a big tax bill.

Fortunately, you can structure your business to minimize your tax liability and also to protect your personal property and assets if your side business gets into trouble.

Independent Contractor vs. Sole Proprietor vs. LLC

Before we go any further exploring the tax benefits of LLCs and other business entities, let’s consider the various options gig workers and small business owners have for structuring their businesses.

Sole Proprietor

If you start a business on your own offering goods or services but have not registered as an LLC or other formal business entity, you’ll file taxes as a sole proprietor. Your customers may or may not issue you a 1099 for your work. You’re responsible for accurately tracking all business income, including cash transactions.

If you receive a single cash transaction exceeding $10,000 as part of your business income, you’ll need to file form 8300. Find out how to avoid IRS Form 8300 here.

Independent Contractor

An independent contractor is also a solo business owner. But independent contractors perform contract work for specific clients and receive a 1099 showing their income. Although they receive a 1099 form showing their earnings, they should also keep track of all their income.

Like sole proprietors, 1099 contractors do not have payroll taxes withheld by the person or company paying them.

An independent contractor may file taxes as a sole proprietor, but not all sole proprietors are independent contractors if they don’t perform work for a specific company for an established fee.

Examples of Business Entities

A graphic designer who provides brochures or infographics to multiple companies would be considered a sole proprietor. An Etsy seller who sells hand-made goods to a variety of customers would also be a sole proprietor. But a Door Dash driver who receives a 1099 from the company would also be considered an independent contractor.

Both independent contractors and sole proprietors must pay self-employment taxes.

An LLC can be either a sole proprietor or an independent contractor. Your status as an LLC means you’ve filed the appropriate paperwork with your state to enjoy the benefits that come with this legal business structure.

Why Contractors Need a Limited Liability Company – LLC

An LLC, or limited liability company, is a business structure that protects your personal assets if your business gets sued. It’s also a good idea to have business insurance, which includes errors & omissions (E&O), to protect your business interests if something goes wrong.

However, if your company is structured as an LLC, clients or customers should not be able to go after your personal assets such as your savings, investments, home, or vehicle. An LLC may also prevent some creditors from going after your personal assets if you default on a business loan.

In a best-case scenario, your business will run smoothly and you won’t need liability protection against a lawsuit. Even so, an LLC also provides numerous tax benefits to protect your hard-earned income.

Tax Benefits of an LLC

First and foremost, incorporating as an LLC allows you to write off expenses as itemized business deductions. Some common business deductions include:

  • Marketing costs
  • Office equipment
  • Office supplies & postage
  • Business travel expenses
  • Start-up costs
  • Health insurance

That’s not a comprehensive list, however. It’s best to speak with a tax professional to pinpoint all the deductions you deserve to reduce your tax liability.

As of 2018, LLCs, sole proprietors, partnerships, and S-Corps can take a tax deduction worth up to 20% of their qualified business income (QBI), further reducing your tax liability.

When you incorporate your business as an LLC, you have several options for how you file taxes. You can choose to be taxed as a sole proprietor, an S-Corp, or a C-Corp. Each of these entities has pros and cons at tax time. A tax professional specializing in small business can help you determine which is best for your financial situation.

What It Means to File as a Sole Proprietor

If you file taxes as a sole proprietor, you can avoid double taxation. You will pay your business taxes on your personal income tax forms. You also qualify for the QBI deduction.

However, you’ll be responsible for paying self-employment taxes. When you work as a W-2 employee, your employer withholds payroll taxes to cover Social Security and Medicare. The employer covers half of the amount. As a self-employed taxpayer, you pay the full amount, although you can deduct the employer portion when you file taxes.

Benefits of Filing Taxes as an S-Corp

Many small business owners and gig workers elect to file taxes as an S-Corp because of the tax benefits. When you file as an S-Corp, you can avoid self-employment taxes. This helps you keep more of your hard-earned money.

However, it’s important to have a solid retirement plan in place. You won’t be eligible to claim Social Security when you’re older if you haven’t been paying into the program throughout your working years. Consider depositing a portion of your income into a tax-advantaged retirement account.

An S-Corp is a pass-through corporation, which means you’ll only pay taxes on your business profits once, on your personal income tax returns.

Final Note

As the gig economy grows, more people will consider legal tax avoidance strategies for their side hustle. Filing as an LLC expands your options to keep more of what you earn.

However, managing a side hustle also comes with unique challenges. If you find yourself with tax debt you can’t afford to pay, it’s crucial to get expert help immediately. Don’t put it off, as interest and penalties will continue to accrue.

Let the pros at Alleviate Tax help you settle your tax debt so that your side hustle can do what it should: Help you achieve your financial goals.


Find out what people are asking about forming an LLC.

Should an independent contractor form an LLC?

An LLC can provide tax benefits as well as other protections for independent contractors, sole proprietors, and gig workers. If you believe you could benefit, it’s best to speak with a professional who can help you incorporate your business.

How is an LLC taxed?

An LLC is a business entity. The way an LLC is taxed depends on how it files. An LLC can be taxed as a sole proprietorship, partnership, S-Corp, or C-Corp, depending on the tax structure of the company. You may be able to avoid self-employment taxes as an LLC if you file as a pass-through corporation.

How much is self-employment tax?

Self-employment tax in 2024 equals 15.3% of your income, with 12.4% going toward Social Security and 2.9% going toward Medicare.

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