Freelancers & Self-Employed Pros: Stop Giving the IRS More Than You Have To
Being your own boss comes with freedom, flexibility, and unfortunately: huge tax bills. If you’re a 1099 contractor, freelancer, or consultant, you might be paying thousands more in taxes than necessary simply because of how your business is structured.
“Why is my tax bill so high?”
Here’s the deal: If you’re a sole proprietor, the IRS taxes 100% of your income with self-employment tax (15.3%). But with the right setup—an LLC taxed as an S-Corp—you could cut that tax bill significantly.
At Insogna CPA, a trusted Austin, Texas CPA firm, we help self-employed professionals keep more of what they earn by setting up tax-smart business structures. Let’s break it down.
Why 1099 Contractors Overpay in Taxes (And How to Stop It)
Here’s what’s happening:
- As a sole proprietor, you’re paying self-employment tax (15.3%) on every dollar you make on top of federal and state income tax.
- Self-employment tax covers Social Security & Medicare, but if you’re making $75K+ per year, you’re handing the IRS a massive chunk of your income.
- Many 1099 workers don’t realize they could be saving thousands just by electing S-Corp status.
What’s an S-Corp?
An S-Corp isn’t a separate business entity. It’s a tax election that allows you to split your income between salary and distributions, reducing your overall tax burden.
Instead of paying self-employment tax on your entire profit, S-Corp owners only pay it on their salary, not on the remaining profit. That’s where the magic happens.
Let’s break it down step by step.
Step 1: How an S-Corp Election Lowers Your Taxes
When you elect S-Corp status, you pay yourself a reasonable salary, and the rest of your profits are distributed as dividends, which aren’t subject to self-employment tax.
Example: Tax Breakdown for a Business Making $100K in Profit
- Sole Proprietor: You owe $15,300 in self-employment taxes (on the full $100K).
- S-Corp Owner: If you pay yourself a $50K salary, you only pay self-employment tax on that amount, saving thousands.
Potential Tax Savings:
- By reducing self-employment tax on $50K, you could save $7,650+ per year.
- The higher your profit, the more you save.
Bottom Line: If you’re making $75K+ in profit, switching to an S-Corp can dramatically lower your tax bill.
Step 2: Is an S-Corp Right for You?
An S-Corp Makes Sense If:
✔ Your annual profit is $75K or more (otherwise, the savings may not justify the paperwork).
✔ You’re okay with setting up payroll for yourself (this is an IRS requirement).
✔ You’d rather take home more of your money instead of giving it to the IRS.
An S-Corp Might NOT Be Ideal If:
- Your business profits are under $50K—the savings won’t outweigh the extra costs.
- You don’t want to deal with payroll or additional compliance.
- You need to keep most of your profits in the business. S-Corps must distribute profits to shareholders.
Not sure if you qualify? Let’s analyze your numbers together!
Step 3: Set Up Payroll the Right Way (No IRS Red Flags, Please)
One major requirement of an S-Corp? You must pay yourself a “reasonable salary.” The IRS requires owners to take a salary before dividends. Otherwise, they’ll flag your S-Corp for abusive tax avoidance.
What’s a “Reasonable Salary”?
✔ It should be based on industry standards (you can’t pay yourself $10K and take $90K in distributions).
✔ Factors include your role, experience, and company profits.
IRS Red Flags:
- Paying yourself too little could trigger an audit.
- Paying too much means you’re losing the tax benefits of an S-Corp.
How Insogna CPA Helps:
- We help determine a fair salary that maximizes tax savings while staying compliant.
- We set up payroll correctly so you avoid IRS scrutiny.
Let’s make sure you’re paying yourself the smart way!
Step 4: Work with a CPA to File the Election & Stay Compliant
Electing S-Corp status isn’t just about filing a form. You need a CPA who understands business structure, payroll, and tax strategy to keep you compliant.
What’s Required?
✔ Filing Form 2553 with the IRS to elect S-Corp status.
✔ Setting up payroll for yourself and any employees.
✔ Filing S-Corp tax returns (Form 1120-S) annually.
✔ Keeping proper documentation for salary vs. distributions.
How Insogna CPA Helps:
- We handle your S-Corp election and ensure it’s done correctly.
- We set up payroll & tax reporting to keep you compliant.
- We help create a proactive tax plan so you save every year.
Want to make the switch? Let’s take care of it for you!
Final Thoughts: Keep More of What You Earn with the Right Tax Strategy
If you’re a self-employed 1099 contractor and you’re still paying 15.3% self-employment tax on all your profit, you’re giving the IRS way more than necessary.
✔ An S-Corp election can significantly lower your tax burden.
✔ You must set up payroll properly to stay IRS-compliant.
✔ Working with a CPA ensures you don’t miss out on tax savings.
At Insogna CPA, a trusted Austin tax accountant, we specialize in:
- S-Corp tax strategies to lower self-employment tax.
- Setting up payroll properly to meet IRS requirements.
- Helping self-employed professionals take home more of their profits legally.
Stop overpaying in taxes! Insogna CPA specializes in helping self-employed professionals keep more of what they earn. Schedule a call today.
