Are You Paying More in Taxes Than You Should?
You built your business to have more freedom, more control, and more earning potential. But when tax season rolls around, does it feel like you’re handing too much of that hard-earned money to the IRS?
Here’s the thing: How you structure your income—whether as a W-2 employee, 1099 contractor, or an LLC with an S Corp election—directly impacts how much you pay in taxes.
If you’re:
- Paying a painful amount in self-employment taxes as a 1099 contractor
- Unsure if you should form an LLC or elect S Corp status
- Frustrated that other business owners seem to owe less at tax time
Then it’s time to take a closer look at how your income structure affects your bottom line. A few smart decisions now can mean thousands in tax savings every year.
Why This Happens: The Tax Difference Between W-2, 1099, and S Corp Income
When it comes to taxes, not all income is created equal. If you’re self-employed or running your own business, you need to know the key differences between W-2 wages, 1099 contractor income, and S Corp distributions.
Breaking Down the Tax Impact
Income Type | How Taxes Work | Pros | Cons |
W-2 Employee | Employer withholds taxes and covers half of Social Security & Medicare (FICA). | Stable paycheck, benefits, no self-employment tax. | Less flexibility, higher taxable income. |
1099 Contractor | You pay self-employment tax (15.3%) plus federal/state income tax. | Full control over income, ability to deduct business expenses. | Responsible for full Social Security & Medicare tax, no benefits. |
LLC with S Corp Election | You pay yourself a reasonable salary (W-2), with additional profits taken as distributions (not subject to self-employment tax). | Significant tax savings, potential for higher take-home income. | Requires payroll setup, additional compliance & bookkeeping. |
If you’re earning 1099 income as a sole proprietor, you’re paying both the employer and employee share of Social Security and Medicare taxes—a total of 15.3% in self-employment tax, on top of your regular income tax. This adds up quickly.
For high-earning freelancers and consultants, switching to an LLC with an S Corp election can significantly reduce self-employment taxes and increase take-home income.
The Solution: Structuring Your Income for Maximum Tax Efficiency
If you’re a consultant, freelancer, or independent contractor, the best way to minimize taxes is to structure your income strategically. Here’s how:
1. Should You Stay a Sole Proprietor or Form an LLC?
If you’re just starting out and making under $50,000 annually, staying a sole proprietor might make sense for simplicity. However, as your income grows, an LLC provides liability protection and tax benefits.
✔ Who should consider forming an LLC?
- Freelancers earning over $50,000 annually
- Independent consultants working with multiple clients
- Business owners looking for legal protection
✔ What an LLC does for you:
- Separates business and personal assets for liability protection.
- Opens the door for S Corp election, which can reduce self-employment taxes.
2. When an S Corp Election Makes Sense
Once your income hits $75,000–$100,000 or more, switching from a sole proprietorship to an LLC with an S Corp election can result in major tax savings.
How an S Corp saves you money:
✔ You pay yourself a reasonable salary (subject to payroll taxes).
✔ Any remaining profits are taken as distributions, which are NOT subject to self-employment tax.
✔ You still deduct business expenses like a sole proprietor, but with added tax advantages.
Example:
- A sole proprietor earning $120,000 pays 3% self-employment tax on the full amount ($18,360 in taxes).
- An S Corp owner pays themselves a $60,000 salary and takes the remaining $60,000 as distributions. Self-employment tax only applies to the salary portion, cutting taxes significantly.
A tax advisor in Austin can help you determine the right salary and profit split to maximize savings without raising red flags with the IRS.
3. Optimize Tax Planning Year-Round
Structuring your income is just one part of the equation. To truly minimize taxes, you need a comprehensive tax strategy that includes:
✔ Quarterly estimated tax payments – Avoid IRS penalties and keep cash flow steady.
✔ Maximizing deductions – Business expenses, home office, retirement contributions, and health insurance can all lower taxable income.
✔ Retirement planning – A Solo 401(k) or SEP IRA can reduce taxable income while helping you build wealth.
✔ Tracking income and expenses properly – Using accounting software like QuickBooks and working with an Austin, TX accountant ensures compliance and maximizes deductions.
A small business CPA in Austin will make sure your LLC, S Corp election, and tax strategy are fully optimized for long-term savings.
Is It Time to Change Your Income Structure? Let’s Find Out.
If you’re still operating as a sole proprietor or filing taxes as a 1099 contractor, you could be paying thousands more in taxes than necessary.
At Insogna CPA, we help business owners in Austin, Texas, and beyond determine the best income structure for maximum tax savings. Whether you need help setting up an LLC, electing S Corp status, or creating a tax strategy that actually works, we’re here to help.
Let’s find the best structure for your business. Schedule a free consultation today.