Ah, the freelance life — showing up for work in your pajamas, carving out your own work schedule, low overhead — you’re living the dream.
And you’re certainly not alone. Data from September 2014 indicates that 53 million individuals work as freelancers in the United States, which breaks down to over one-third of the country’s working population.
But those who are serious about their careers as freelancers typically elect to create a separate business entity. The number one reason to create a Limited Liability Corporation (LLC) is to protect the individual freelancer’s personal assets in the event of a liability claim being pursued.
You might think that you’re only a writer and not a doctor or other professional whose mistakes can have grave consequences. You can’t see the need for incorporating for liability reasons.
But there are factors that must be considered. Business could start booming and you might need to hire an associate to answer phones or handle other office duties. As an LLC, your personal assets are shielded from some of the liability risk of an employee’s misconduct or negligent actions.
This isn’t to say that you don’t have personal responsibility for the services you agree to provide. That lies with you regardless of status as a corporation or sole proprietor.
With an LLC, you also have a layer of separation between debts incurred by your business (which you could one day be unable to pay) and your personal finances. That can be very important if your business ever goes belly-up.
The tax dilemma
Freelancers who dodge their self-employment taxes will eventually have to face the wrath of the Internal Revenue Service (IRS), and that’s never fun. However, incorporating as an LLC and getting taxed as an S-Corp is a viable strategy to minimize the taxes freelancers can’t avoid.
Just make sure that as an S-Corp owner you are above-board in both your salary payments and distributions, as only salary is considered taxable self-employment.
Be aware that the IRS pays close attention to the amount of salary small business owners take. Drawing disproportionately large distributions and only a small salary will put you under the Fed’s radar for sure.
To make the best decision for your particular circumstances, learn the options you have available to you under Pennsylvania laws.
Source: Small Business Trends, “Myths and Realities About Incorporating for Freelancers,” Nellie Akalp, accessed Aug. 18, 2017