1099 Contractor: How Much Does an LLC + S-Corp Election Actually Save You?

Why most freelancers overpay tax

When you're a 1099 contractor (or sole proprietor), you pay self-employment tax: 15.3% on every dollar of net business income (12.4% Social Security + 2.9% Medicare). That's on top of regular federal + state income tax.

An LLC by default is taxed as a sole proprietorship (single-member) or partnership (multi-member). Same self-employment tax exposure. The LLC alone doesn't save you tax.

S-corp election is what unlocks tax savings. Once your LLC elects S-corp tax treatment, you become an employee of your own company. You pay yourself a 'reasonable salary' (subject to payroll tax = self-employment tax equivalent), and the rest of profits flow through as distributions (NOT subject to self-employment tax).

The math at $100k net income

Without S-corp election (sole prop or default LLC):

Net business income: $100,000

Self-employment tax: $14,130 (15.3% × $92,350 — the SE tax base)

Plus federal + state income tax on $100,000

With S-corp election:

Reasonable salary to yourself (let's say $60,000 — must be defensible)

Payroll tax (employer + employee portion) on $60,000: $9,180

Distributions: $40,000 — no payroll/SE tax

Plus federal + state income tax on $100,000 (same)

Net tax savings: $14,130 - $9,180 = $4,950/year

When the math actually works

Below $80,000 net business income, S-corp savings are minimal because the 'reasonable salary' rule eats most of the benefit. Below $50,000, S-corp election usually costs more (in payroll administration overhead) than it saves.

Above $200,000 net, the savings can hit $15,000+/year because you can compress your salary while still being defensible.

Sweet spot: $80,000-$300,000 net, in a state without especially high franchise tax (CA's $800 for the LLC + $800 minimum if S-corp doesn't reduce it, plus $25/employee state payroll tax).

The catch — you have to file payroll

S-corp election means you're an employee of your own company. You have to file quarterly federal payroll (Form 941), annual state payroll, W-2s by January 31, and pay yourself on a regular schedule (usually monthly or biweekly).

Most freelancers either: hire a payroll service ($20-$50/mo) like Gusto, OnPay, or Patriot; or hire a CPA who handles it. Self-managing payroll is technically possible but a pain.

What about California specifically?

CA doesn't recognize federal S-corp election the same way the IRS does. CA charges 1.5% S-corp franchise tax on top of the $800 minimum LLC franchise tax. So at $100,000 net: $1,500 S-corp tax + $800 minimum LLC franchise tax = $2,300 to CA. Federal savings of $4,950 minus state increase of $1,500 = ~$3,450 net savings.

Still positive, but smaller than out-of-state freelancers. Plan accordingly.