It’s worth noting on this Labor Day that the number of independent contractors in the United States totaled 64 million last year, up 4 million from 2022. Other surveys put the number of freelancers this year at 76 million, one-third more than in 2017.
If you’re one of those millions joining the self-employed workforce, know that it’s not as easy as taking a second job or having an online contract. You probably should establish a business to follow the law and avoid civil liability. It’s extra work that can pay dividends at tax time.
The first step is to create a registered business to handle all financial and legal matters. Several websites provide guidance, including this webpage from the Florida Division of Corporations.
You could opt for a sole proprietorship because it’s simpler. No formal registration is required, and you include business income in your individual or joint tax return. However, a proprietorship will not protect your personal assets from a civil lawsuit on a business matter.
For that and other reasons, consider opening one of two types of businesses, each of which has its plusses:
Limited Liability Company (LLC)
- Provides liability protection for personal assets
- Can be taxed as a sole proprietorship, either (single member) or partnership (multi-member)
- Is more flexible than a corporation
Corporation (S-Corp or C-Corp)
- Provides liability protection
- More complex structure with formal requirements
- Potential tax advantages, especially for S-Corps
There are other, more professional reasons to incorporate:
Liability Protection
- Incorporating as an LLC or corporation creates a separate legal entity, protecting your personal assets from business debts and liabilities.
Tax Benefits
- You can reduce self-employment taxes by paying yourself a salary plus distributions as an S-Corp
- You may be able to take more deductions for business expenses
- You can retain earnings in the business at potentially lower tax rates (applies to C-Corps)
Credibility
- Having an official business entity can boost your professional image and credibility with clients and partners.
Of course, you will need a bank account. Tropical Financial Credit Union is there to help with its business services, lines of credit and equipment loans, and preferred services for employees – which could be you once you incorporate.
A Tropical Financial business banker will sit with you to open a checking account. Opening one will help:
- Maintain liability protection because of your status as an LLC or corporation
- Simplify accounting each month and tax preparation each quarter and year
- Build business credit
If you are like many freelancers, you will be working remotely. A business checking account will help you establish that a business exists there. Setting up a home office will allow you to deduct a portion of home expenses for business use.
You must clearly separate business and individual activities to claim expenses on your federal tax return. That means using the space only for work – no personal finances or other matters. This IRS webpage can guide you, as can these tips from a leading accounting firm.
What else do you need? Accounting software to:
- Track business income and expenses
- Simplify tax filing
- Provide financial insights for decision-making
Is it worth it to incorporate? Much depends on your situation. If you earn significant extra income, the benefits often outweigh the extra work. They include:
- Setup and maintenance costs such as filing fees and annual reports
- More complex accounting and tax filing requirements
- Additional administrative responsibilities and paperwork
If you are serious about making extra income or transitioning from employee to business owner one day, talk to a tax professional or business attorney. That person can help you think through the process to take the proper steps from the start.
