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I’ve gone through this transition myself and worked with a tax advisor along the way, so I’ll share what I’ve learned in case it helps.
An LLC is a legal structure that protects your personal assets if your business gets sued. It’s formed at the state level and separates your personal and business finances, just be sure to keep them strictly separate (bank accounts, credit cards, etc.) to maintain that protection.
An S-Corp isn’t a business type, but a tax election you can make for your LLC by filing IRS Form 2553. It can help you save on self-employment taxes by letting you pay yourself a salary (which is taxed normally) and take additional profits as distributions (which aren’t subject to self-employment tax). That said, it’s only worth the extra admin (payroll, separate tax returns, compliance) if your freelance business is consistently earning enough (usually over $60–80K in net profit).
Regarding what can you write off as a freelancer… if you’re earning 1099 income, you can deduct a lot more than you can as a W-2 employee. Some common write-offs include:
Home office (must be regular and exclusive use)
Internet, phone, software, and subscriptions
Equipment, business mileage, professional development
Health insurance premiums (if you’re self-employed and not eligible through a spouse)
One lesser-known benefit, you can set up a Solo 401(k) or SEP IRA, which lets you contribute significantly more toward retirement than a traditional IRA, potentially lowering your taxable income by tens of thousands each year. Great if you’re looking to build long-term savings while reducing what you owe now.
If you’re employed and freelancing on the side, you can still deduct expenses related to your freelance work. Just keep the records clear and separate. Since the 2018 tax changes, you can’t deduct unreimbursed W-2 job expenses anymore, but your 1099-related write-offs are still valid.
Lowering your reported income (through deductions or S-Corp distributions) reduces the amount you pay into Social Security, which can affect your future benefits. But benefits are based on your 35 highest earning years. And if you’re investing the tax savings $$$ wisely, you could end up ahead anyway.
+1 on the Solo 401k being much better than a SEP IRA
I highly recommend this book, will save you tens of thousands per year. https://a.co/d/2jxOM2N
TY for sharing this!
Yes. Worth it. Freelancing can be FAR more lucrative than any 9-5.
Yes, my peers who do it have said this. They've also said the highs have been high and lows have been low the past few years and that it's a tough time to start. Either way, I'm laid off, so figure it's better to action now than wait for that perfect FT role to come around.
Senior Manager 1, you are the best! TY for outlining this all plus some common pittfalls and misconceptions. That nuance matters!
Qq about "intent to start a business and are actively preparing for it." + "taking legitimate steps to operate." I just wrapped my first contract role. It was on a W2 because the employer didn't offer a 1099. Does this count as "bona fide intent" (basically am I officially a business from here on out because I've earned money this way) and will it suffice in terms of deducting expenses if I continue to only get W2s, potentially in perpetuity, in subsequent contract jobs? The one I'm currently interviewing for only offers that as well.
TY TY again for being such a freelance BOSS.
Super helpful. TYSM!