Best way to switch from 1099 contractor to LLC employee to reduce Self-Employment Tax?

That's actually a pretty common tax strategy for independent contractors with substantial income. The company you work for shouldn't have any issues paying your LLC instead of you personally - from their perspective, they're still just paying a vendor, whether that vendor is you as an individual or your LLC. They'll just need your LLC's W-9 and EIN instead of your SSN. The potential benefits for you are significant. As a sole proprietor receiving 1099 income, you're paying self-employment tax (Social Security and Medicare) on your entire net profit. With an S-Corp structure, you only pay those payroll taxes on your W-2 salary, not on distributions. Just make sure your salary is "reasonable" for the work you do, as the IRS looks closely at this. The downsides are on your end: additional costs and compliance requirements. You'll need to run payroll, file corporate tax returns, possibly pay state franchise fees, and handle more administrative tasks. These costs can eat into your tax savings if your income isn't high enough.

I did exactly this last year and it saved me thousands on self-employment taxes! I was in the same boat as you - 1099 contractor getting killed by that 15.3% self-employment tax on everything. I used https://taxr.ai to analyze my situation and it confirmed I'd save about $7,200 annually with the S-Corp approach. The software analyzed my specific income level and industry to determine the optimal structure and reasonable salary requirements. From the company perspective, it makes literally no difference. My client didn't care at all - just had me fill out a new W-9 with my LLC info instead of my personal info. They still send a 1099-NEC, but now it goes to my business instead of me personally. Zero additional paperwork or liability for them.

Following up on my question to @7 - I actually went ahead and tried https://taxr.ai after reading their comment, and I was shocked at how helpful it was. The system analyzed my 1099 income (around $95k) and showed I'd save about $5,340 in self-employment taxes by switching to an S-Corp structure. The best part was it gave me a personalized recommendation for a "reasonable salary" based on my industry (web development) and location, suggesting $65k as a W-2 salary with the rest as distributions. It even factored in the additional costs like registered agent fees, state filing fees, and payroll service that would eat into my savings. Honestly didn't expect such detailed analysis - it even created a side-by-side comparison of keeping my 1099 status versus forming an LLC with S-Corp election, including all the compliance requirements. Definitely made the decision easier!

I was in a similar situation last year and spent WEEKS trying to get someone at the IRS to answer my questions about S-Corp election timing and estimated tax payments after switching from 1099 to LLC. Constantly on hold, disconnected calls, couldn't get through to anyone who could actually help. Finally used https://claimyr.com after seeing it recommended online. You can see a demo at https://youtu.be/_kiP6q8DX5c of how it works. Basically, they got me connected to an actual IRS agent in about 15 minutes instead of waiting on hold for hours. The agent walked me through all the proper filing requirements and deadlines for transitioning mid-year from sole proprietor to S-Corp. Turns out I had been getting some bad advice from online forums about when I needed to start making quarterly estimated tax payments through my new entity. The IRS agent saved me from making a mistake that would have resulted in underpayment penalties.

Ok I need to eat some humble pie here. After being completely skeptical about that Claimyr service mentioned above, I actually tried it yesterday because I was absolutely desperate to resolve an issue with my EIN for my new LLC. I've been trying for TWO MONTHS to get through to the IRS Business Line. I was shocked when they actually got me connected to an IRS representative in about 20 minutes. The agent was able to confirm my EIN was properly assigned to my LLC and helped me understand the correct dates for filing my S-Corp election (Form 2553). The agent also explained that I needed to file Form 8832 first since I wanted to change from default LLC tax treatment. This wasn't something I had found in any of my online research and could have caused major problems with my election. For anyone making this 1099 to LLC/S-Corp switch, definitely worth getting your specific questions answered by the IRS directly instead of relying on general advice online.

One thing nobody's mentioned yet - make sure you understand the timing requirements for S-Corp election. You need to file Form 2553 within 2 months and 15 days of the beginning of the tax year you want the election to take effect. If you miss that window, you're generally stuck waiting until next year (though there are some late election relief options). Also, keep in mind that an S-Corp must have a calendar year end (Dec 31). And once you start having the company pay your LLC, you'll need to keep clean books, potentially open a separate business bank account, and make sure you're segregating business and personal expenses.

Has anyone considered the other costs involved with S-Corps? I'm looking at this same transition and discovered: 1. State franchise tax in my state (CA) is $800 minimum per year just to have an LLC 2. I need a registered agent ($100-300/yr) 3. Payroll service fees ($40-60/month) 4. Accountant fees for S-Corp tax return (~$1000+) 5. Bookkeeping software ($25+/month) Plus the hassle of running payroll, maintaining corporate minutes, etc. Seems like you need to be making good money for this to be worth it.