Sole Proprietorship (Default)
A sole proprietorship is unincorporated. Business income and expenses are reported on Schedule C of your personal tax return. All net profits are subject to self-employment tax (15.3%) plus ordinary federal and state income tax.
Single-Member LLC
By default, a single-member LLC is treated as a 'disregarded entity' for tax purposes, meaning it is taxed exactly like a sole proprietorship. However, it provides vital personal liability protection.
S-Corporation Election
Once net freelance earnings exceed roughly $80,000 - $100,000, electing S-Corp status can provide substantial tax savings.
S-Corp Tax Saving Mechanism:
1. You divide income into **Salary** (W-2) and **Distributions** (Shareholder dividends).
2. You pay self-employment/payroll taxes *only* on the Salary portion.
3. The Distributions portion is exempt from self-employment taxes (saving 15.3% on that segment).