Should freelancers form their own corporation?

Jun 5, 2015 by jgordon@unitedmediaguild.org

Freelancers in the media industry typically operate as sole proprietors from the tax standpoint. As such, they must pay self-employment tax on their net income.

Would they gain any benefit from forming a corporation?

Perhaps, depending on the scope of their operation. By electing to be taxed as S Corporation, they could pay themselves in both salary (subject to self-employment tax) and distributions (not taxed as self-employment tax).

Writing for Small Business Trends, Amy Akalp offered this warning:

Be careful when splitting your payment this way as the IRS watches carefully to make sure S Corporation owners are paying themselves a fair salary for the work they do, and aren’t just getting paid in distributions

Freelancers should enlist the help of a professional tax adviser while structuring their corporation and classifying their compensation.

Aklap cited some other possible benefits from forming a corporation:

If you hire employees, contractors or subcontractors, an LLC/corporation can limit liability caused by negligence or misdeeds by these employees.
These business structures can protect your personal assets in matters of contractual liability – should your business not be able to hold up its end of a contract. For example, if your business needs financing to buy property or equipment, an LLC/corporation can help protect your personal assets (as long as you don’t personally guarantee the loan!).
Larger companies typically prefer to work with corporations or LLCs, not sole proprietors . . . There are significant tax implications when a corporation hires a sole proprietor as a contractor . . . there’s a chance that the IRS will double check to make sure that worker is truly operating as a contractor and not as an employee. But this isn’t a concern when a business hires an LLC or corporation to do the work.

She also notes that:

Forming an LLC or corporation won’t automatically protect your personal assets in all situations. You’re still responsible for your personal actions regardless if your business is a corporation or a sole proprietorship.

And since freelancers personally provide services, they can be liable for their conduct.

The bottom: Forming a corporation is worth considering, but only after consulting with a tax professional.