Tax benefits for consultants

An individual consultant probably does not need to incorporate. But, if he or she feels some comfort with a corporate structure, then either a corporation or a limited liability company (LLC) is what I would recommend. If a corporation were used, the owner would claim S corporation status by filing a form to elect that special status. If an LLC is used, the consultant elects to be disregarded as a separate entity by filing a different form. The main income tax benefit to both S-corp status and the LLC is that there's no federal income tax on the company -- the consultant includes the income in his or her own personal income tax return.

There's a difference, though, between S-corps and LLCs with respect to the self-employment tax, usually referred to by its initials "SECA." That's the counterpart to FICA -- the Social Security tax that employers and employees pay. An owner of an LLC who elects to have the entity disregarded would be subject to SECA on the entire net income of the LLC. The owner of an S-corp or of an LLC who elects S-corp status can pay himself or herself a "reasonable" salary, which would be subject to FICA, and enjoy the rest of the company's income free of FICA and SECA (but subject, of course, to income tax).

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Eli C. Bortman

Lecturer in law