For most tradespeople the answer is a single-member LLC, taxed the same as a sole proprietor, until your profit gets high enough (usually around $70,000 to $80,000 a year) to elect S-corp status and cut your self-employment tax. Here is the plain version: an LLC protects your house and savings, the S-corp election saves you tax but only past a certain income and only if you run payroll, and below that you keep it simple. Now the detail.
It is two structures and one tax switch, not three options
This trips everyone up. There are only two actual structures, sole proprietor and LLC, plus one optional tax election (S-corp) you can flip on top of an LLC later. The "S-corp" is not a separate kind of company. It is a tax setting.
Sole proprietor: simplest, and riskiest
You and the business are the same thing. Nothing to file, no fee, you report on Schedule C. The catch is unlimited personal liability: if the business gets sued or owes money, your home, truck, and savings are on the table. Fine for a first month or a tiny side job, risky as a place to stay.
Single-member LLC: the sweet spot for most
An LLC is a separate legal entity, so done right it protects your personal assets from business claims. And here is the key point most people miss: for taxes, a single-member LLC is treated exactly like a sole proprietor. Same Schedule C, same self-employment tax, no extra tax cost. It costs a modest fee to form (and a small annual fee in some states), and it does one big job, shielding your personal stuff, without changing your tax bill. For most trades, this is where you start.
The S-corp election: the tax play, later
Once you are genuinely profitable, you can elect S-corp status (IRS Form 2553). It does not change your LLC, it changes how the income is taxed. You split your money into two buckets:
- A W-2 salary you pay yourself, which carries the full 15.3% payroll tax.
- Distributions, the rest of the profit, which are not hit with self-employment tax.
That saves you 15.3% on the distribution part. On a good year that can be several thousand dollars.
The two catches that decide it
- You have to pay yourself a reasonable salary first. The IRS will not let you set a $1 salary and take everything as tax-free distributions. "Reasonable" means what your trade actually pays for your role in your area (they look at BLS wage data for your metro). Lowball it and they reclassify your distributions as wages, with back taxes and penalties. So pull your trade's real wage for your area before you set it.
- It costs money to run. Payroll, a separate corporate tax return, and a CPA who knows S-corp mechanics run roughly $1,400 to $3,800 a year. The election only pays off when the tax saving beats that cost.
The breakeven
Rule of thumb: the S-corp election usually starts making sense once your net profit is above about $70,000 to $80,000 a year. Below that, the compliance cost eats most of the saving. Above it, the math swings your way, and by six figures it is clearly worth it. On $120,000 profit with a $65,000 salary, for example, you save several thousand dollars a year even after the extra costs.
The move
Start as an LLC. It is cheap, it protects you, and it costs you nothing extra at tax time. Keep it simple until your profit climbs past roughly $70,000 to $80,000, then have a CPA run your numbers on the S-corp election. Do not rush into S-corp on a small profit, and do not stay a bare sole proprietor once you have assets worth protecting.
Common questions
Do I need an LLC to work as a contractor?
No, you can legally operate as a sole proprietor with nothing to file, but you carry unlimited personal liability doing it. As a sole proprietor you and the business are the same thing, so if the business is sued or owes money, your home, truck, and savings are exposed. An LLC is a separate legal entity that shields your personal assets, and for a single owner it is taxed exactly the same as a sole proprietor, so it protects you without raising your tax bill. For anyone with assets worth protecting, the modest cost of an LLC is usually worth it. Formation fees vary by state; see Working in Your State.
Does forming an LLC lower my taxes?
No. A single-member LLC is taxed exactly like a sole proprietor, on the same Schedule C with the same self-employment tax, so forming one does not change your tax bill on its own. What an LLC buys you is legal liability protection for your personal assets, not a tax cut. The tax saving only comes later, and separately, if you elect S-corp status once your profit is high enough to justify it. So form an LLC for protection, not for a lower tax bill, and treat the S-corp election as the actual tax move.
Can I be an LLC and an S-corp at the same time?
Yes, and that is normally how it works. The S-corp is a tax election you flip on top of an existing LLC, not a separate kind of company. You keep your LLC as the legal structure and file IRS Form 2553 to have it taxed as an S-corp, which lets you split income into a salary and distributions to cut self-employment tax. Your LLC does not change; only how the income is taxed does. This is why most tradespeople start as an LLC and add the S-corp election later, once profit clears roughly $70,000 to $80,000 a year and they are willing to run payroll.
How much does it cost to start an LLC?
It is a modest one-time formation fee, plus a small annual fee in some states, but the exact amounts vary by state and this guide does not card them. Some states charge next to nothing to form and maintain an LLC; others charge several hundred dollars a year. Because the numbers differ so much, get your state's current formation and annual fees from Working in Your State before you file. Whatever your state charges, forming where you actually work is almost always cheaper overall than the alternative below.
Should I form my LLC in another state like Wyoming or Delaware to save money?
No, not if you work in your home state. Form your LLC where you actually operate. Registering in a "cheap" state while working somewhere else means you still have to register as an out-of-state (foreign) LLC in your home state anyway, so you pay two sets of fees and file in two places for no real benefit. The online ads promising savings from forming in another state rarely make sense for a local trade business. Form in the state where you do the work, and check its fees in Working in Your State.
The honest bit
- State formation and annual fees vary a lot (some states charge nothing, others several hundred a year). See Working in Your State.
- Your reasonable salary must reflect real wage data for your trade and metro, not a round number off a blog. Pull it from BLS.
- This is exactly the decision where a good CPA pays for themselves. This is general guidance, not tax or legal advice.
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Keep reading
Templates you might need
Sources
- IRS - Business structures · What each structure IS for federal tax purposes, and that the choice decides which return you file rather than how much work you can take on
- IRS - S corporations · The election, the eligibility requirements, and that an S corporation passes income through to shareholders rather than paying tax itself
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