There is a better way and I can show you how.

If you are running your business as a sole proprietor, then you are filing a Schedule C as part of you annual 1040 income tax filing, but even thought that is technically a business, it is likely not the best business structure for you to use.

If you have formed your business either as a Corporation or as a Limited Liability Company (LLC) and file with the IRS a an election to be taxed as an S-Corporation (known as an S-Corp) Form 2553, then instead of being taxed as the default, your company will be taxed as an S-Corp, which has a number of advantages.

Have you created a company for your Independent Contracting Practice?

The default structure for a Corporation is a C-Corporation, which you will recognize because it is the structure of most of the big companies are (Google, Apple, Microsoft, etc.), and all of the companies that have their stock on the stock market.

The default structure for an LLC depends on how many owners of the company, but since we are talking about Independent Contracting, there is typically only one owner, which by default would be a Sole Proprietor. So by default you are going to end up on the same Schedule C that you were trying to avoid.

In order to change that default then, you need to file the Form 2553.

Being taxed as an S-Corp has many benefits over being taxed as a sole proprietor, which is what you are when you file a Schedule C on your 1040 income tax return.

There are many advantages to forming a company for your business endeavor, and taxes are just a few of those.

When you have a company, you then have some say in how much Payroll taxes you pay. You do this by deciding upon the salary that you are going to pay yourself, which with a sole proprietorship, you have no control over. You have to take everything the business makes as a salary.

You have the ability to take a quarterly Ownership distribution as part of your pay instead of taking it all as self-employment income. That gives you the ability to be more flexible in when you pay yourself, and how much of your income is subject to payroll taxes.

You have total over your Retirement planning and can then control every aspect of your Retirement accounts, including what, when, where and how much to invest.

One other big advantage of having a company that has nothing to do with taxes is that a company is a separate legal entity.

The company is legally treated as an individual itself, which for a sole proprietor is not the case. As a sole proprietor the owner is the business, they are one and the same, so anything the owner does, even if it is exclusively for business purposes, he is still personally and financially responsible for those actions.

When you have created a company as a separate legal entity, then you have protected yourself and your family from potential Legal and Liability issues that may arise against the company, as those will need to be addressed with the company itself and not against the owner of the company.

All of the above and more are why I have an LLC that I elected to be taxed as an S-Corp. I know some others that are just doing straight S-Corps as well.

What structure is best for your situation? If you already have a company, did you create an S-Corp? Or an LLC taxed as an S-Corp? Or something else all together?

Author's Bio: 

Paul Monax
Independent Contracting Resources

I am a Mentor for Independent Contractors to help them with the Business Side of their Business.
I have been a small business owner of a number of businesses over the past 11 years.
For the past 6+ years have been as the owner of a small Independent Contracting business specializing in custom software development for large enterprise systems.

Because Being Independent Doesn't Mean You Have To Do It All Alone!