Most tax beneficial way to incorporate as a contractor


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I am currently contracting as a software engineer on a W2, and I am thinking of incorporating. Which is the most tax beneficial way, an LLC, sole proprietorship, S-Corp?

Keep in mind that at this time I do NOT own a home, so I cannot benefit from any home related tax write-offs. I am also a resident of the state of California.

LLC Incorporation Tax

asked Jun 18 '11 at 07:53
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Christopher Perry
116 points

2 Answers


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I am no longer a contractor, but when I was it was in CA where I incorporated as a type C because I was able to set up a defined benefit retirement plan. It allowed me to contribute an unlimited percentage of my income to the plan. At the time I was grossing about $10K per month and put about three quarters of that into the plan. This really paid off. The hitch is that if you hire employees, then the company must contribute the same amount for each employee. Since I had no employees, this was not an issue.

answered Jun 19 '11 at 03:56
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Textpert
21 points
  • Why couldn't you do that with S-Corp? – Littleadv 8 years ago

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Both the easiest to start and lowest in taxes and fees is the sole proprietorship, but this isn't incorporating. You're just declaring yourself as a business and accepting all the risk (though PL and GL insurance helps). When dealing with businesses, this is frequently referred to as a 1099 contractor as opposed to a corp-to-corp.

Next best option for an individual is the LLC since everything can be passed through to yourself to avoid any double taxation. There is more overhead to set it up, but it also comes with some protections (hence "limited liability" in the name).

Of course the standard disclosures apply, check with your local CPA, lawyer, tax advisor, etc.

answered Jun 18 '11 at 10:31
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B Mitch
1,342 points

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LLC Incorporation Tax