Is forming an S Corp or LLC better for tax savings than staying as 1099 contractor?

Setting up a business entity is absolutely worth considering at your income level! When you're earning $675k as a 1099 contractor, you're currently paying self-employment tax (15.3%) on your entire net profit. With an S Corporation, you would pay yourself a "reasonable salary" and only pay employment taxes on that portion, while taking the rest as distributions that aren't subject to self-employment tax. For example, if your reasonable salary is $175k (depends on your industry and role), and your total profit is $675k, you'd save approximately 15.3% on the remaining $500k, which is about $76,500 in tax savings per year. That's substantial! An LLC by itself doesn't change your tax situation - it's still reported on Schedule C like your current 1099 work. However, an LLC can elect S Corp taxation status, giving you the best of both worlds: liability protection and tax savings. There are additional costs though: payroll processing, more complex tax filings, potential state fees, and you'll need an accountant familiar with S Corps.

Hey there! I was in your exact situation 2 years ago - making good 1099 income but losing a ton to taxes. I was skeptical about all this business structure stuff until I tried https://taxr.ai to analyze my situation. They took my previous tax returns and showed me side-by-side comparisons of what I would've saved with different entity structures. What surprised me was seeing the actual numbers for MY specific situation rather than just general advice. For me, the S Corp route saved about 11% overall on my tax bill. Their system also flagged business deductions I was missing out on as a 1099 contractor that I didn't even know existed. I ended up forming an S Corp and haven't looked back. The service walks you through each step of setting everything up properly too.

I need to eat my words from my skeptical comment above. I finally tried https://taxr.ai after delaying for months thinking it was just another gimmick. The analysis showed I was overpaying by $32k annually by staying as a solo 1099 contractor! What really convinced me was seeing all the specific deductions I was missing - home office, health insurance premiums, cell phone, internet, and even my car lease that I use partly for business. The S Corp savings were substantial too, but honestly just fixing my deductions alone was worth it. The step-by-step implementation plan made it manageable to transition without feeling overwhelmed. I'm kicking myself for not doing this sooner.

If you decide to go the S Corp route after getting your analysis, don't forget you'll need to deal with the IRS when setting up payroll and other business matters. I spent HOURS on hold with the IRS trying to get my EIN and payroll questions answered. Total nightmare. I finally discovered https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c - they basically wait on hold with the IRS for you and call when an agent picks up. Saved me literally 4+ hours of hold time on each call. When you're switching from 1099 to S Corp, you'll have several required IRS interactions, and being able to skip those multi-hour hold times was a game-changer for me. I was able to keep working while they handled the waiting.

I'm back to eat crow about my skeptical comment. After my accountant told me I absolutely had to talk to the IRS about my late S Corp election (missing deadline by 2 weeks), I decided to try Claimyr rather than waste half a day on hold. Got a call back 3 hours later while I was in a client meeting. Stepped out, talked to the IRS agent who helped me file for an extension on my S Corp election deadline. Total time spent by me: 15 minutes actual talking. Would have been 3+ hours of hold time otherwise. I still think it's ridiculous we need services like this, but man am I glad it exists. Totally worth it when you're transitioning business structures and have multiple required IRS interactions.

Something nobody's mentioned yet - if you go S Corp, make sure to set up health insurance correctly. If you do it wrong, you lose the deduction. You need to have the S Corp establish the plan and reimburse you, or directly pay the premiums. Our accountant messed this up the first year and it cost us thousands. Also, don't forget about QBI (Qualified Business Income) deduction implications. Switching to S Corp can reduce your QBI deduction because it's based on your profit, which is lowered by your salary. Sometimes the self-employment tax savings outweigh this, sometimes not. With $675k income, you're likely over the phase-out threshold anyway, but worth considering if your income fluctuates.

Quick timing question - it's already November, is it too late to set up an S Corp for this tax year? Or would I be setting it up for next year's taxes at this point?

I've been both 1099 and S Corp over my 15-year consulting career, and here's my practical take: at $675k, the S Corp advantage is massive, BUT remember you're trading simplicity for tax savings. With an S Corp you'll need: - Regular payroll processing - Workers comp insurance in many states - More complex bookkeeping - Corporate formalities (minutes, etc.) - Separate business banking - Annual state fees and reports The tax savings easily justify this complexity at your income level, but be prepared for about 5-10 hours/month of additional administrative work unless you outsource it all (which eats into your savings). One final note: many banks offer better business lending terms to established entities vs. sole proprietors. This became hugely valuable when I wanted to purchase commercial property for my business.

At your income level, you're definitely leaving substantial money on the table by staying as a 1099 contractor. I made the switch to S Corp about 3 years ago when my consulting income hit similar levels, and the tax savings have been significant. Here's what I wish someone had told me upfront: the "reasonable salary" determination is crucial and can make or break your tax strategy. I researched comparable salaries in my field extensively and settled on about 35% of my total profit as salary. This saved me roughly $45k annually in self-employment taxes while staying well within IRS guidelines. One thing that surprised me was how much the business entity opened up additional deduction opportunities beyond just the payroll tax savings. Business meals, travel, equipment purchases, and even my home office became much more defensible as legitimate business expenses. The administrative burden is real though - I spend about 2-3 hours monthly on corporate maintenance tasks, plus the added cost of payroll processing and a good business accountant. But when you're saving tens of thousands annually, those costs are easily justified. My advice: start the process now to be ready for next tax year, and definitely consult with a tax professional who specializes in S Corps. The setup cost will pay for itself many times over at your income level.