Every corp-to-corp recruiter you talk to eventually asks the same question: do you have your own entity? Somewhere along the way, a Reddit thread or a well-meaning colleague convinced you that forming an LLC, or electing S-corp status, is just what serious consultants do.
It is not automatic. An entity is a tool with real costs attached — state fees, payroll administration, a reasonable-salary obligation if you elect S-corp status, and bookkeeping you did not have before. For some consultants it saves thousands a year. For others it is pure overhead dressed up as professionalism.
This is the math, not the folklore.
What an LLC Actually Does
A single-member LLC is, by IRS default, a disregarded entity. Your business income still flows onto Schedule C of your personal Form 1040, and you still pay self-employment tax — 15.3% on net earnings, covering both halves of Social Security and Medicare — exactly as you would as a sole proprietor.
What the LLC adds at this default tax status is liability separation at the state level: your personal assets are generally shielded from business debts and claims, provided you keep business and personal finances genuinely separate. For a consultant whose main risk is a client dispute over deliverables rather than bodily injury or property damage, that shield matters less than people assume. Most C2C contracts already route liability through the staffing vendor's master agreement and your own professional liability policy, not through your entity structure.
In plain terms: forming an LLC by itself does not reduce your tax bill. It is a liability and credibility layer, not a tax strategy.
The S-Corp Election: Where the Savings Actually Come From
The tax savings people are chasing come from electing S-corp tax treatment — either by forming a corporation and filing Form 2553, or by having your LLC file Form 2553 to be taxed as an S-corp while remaining an LLC legally.
Under an S-corp election, you become an employee of your own company. You pay yourself a reasonable salary through payroll, with normal withholding and employer-side payroll taxes. Any remaining profit can be distributed to you as a shareholder distribution, which is not subject to self-employment tax.
That is the entire mechanism. Self-employment tax applies to salary; it does not apply to distributions.
The catch is the word reasonable. The IRS does not publish a formula, but it has successfully challenged S-corps that paid artificially low salaries to inflate distributions. Your CPA will benchmark your salary against what a W-2 employee doing comparable work would earn in your market — for most senior technology consultants, that lands well above minimum thresholds some online calculators suggest. Underpaying yourself to maximize distributions is an audit flag, not a strategy.
The Overhead Nobody Mentions in the Recruiter Pitch
Here is what an entity actually costs you every year, independent of your income level:
- State formation and annual fees — ranges from roughly $50 a year in low-cost states to several hundred, and California imposes an $800 minimum annual franchise tax regardless of profit.
- Registered agent service — typically $50 to $300 a year if you use a commercial agent rather than your own address.
- Payroll processing — required once you elect S-corp status, since you must run yourself through payroll with quarterly filings (Form 941, state equivalents). Budget $40 to $150 a month for a basic payroll service.
- A separate business bank account and bookkeeping — not optional if you want the liability shield or S-corp election to survive scrutiny. Commingled funds are the fastest way to pierce an LLC's protection.
- A separate business tax return — Form 1120-S for an S-corp, plus a Schedule K-1 that flows to your personal return. Expect a CPA fee of several hundred to over a thousand dollars annually on top of your personal return.
None of this is prohibitive for a consultant billing $100-plus an hour. But it is real money and real administrative load, and it does not disappear just because a recruiter prefers to see a corp name on the invoice.
LLC Default vs. S-Corp Election: Side by Side
| Factor | LLC (default, disregarded) | LLC taxed as S-corp |
|---|---|---|
| Self-employment tax | Applies to all net income | Applies only to salary portion |
| Payroll required | No | Yes — reasonable salary via W-2 |
| Annual tax filing | Schedule C with personal 1040 | Form 1120-S plus personal 1040 |
| Bookkeeping load | Light to moderate | Moderate to heavy |
| Typical added annual cost | $100-$800 (state fees) | $1,500-$4,000+ (payroll, CPA, filings) |
| Where it starts paying off | N/A — liability only | Usually once net consulting income clears roughly $80,000-$100,000 after expenses |
The H-1B Exception: Read This Before You Form Anything
If you are a sponsored H-1B worker, this entire conversation changes. H-1B status requires a valid employer-employee relationship between you and the petitioning employer, meaning that employer must retain the right to control the manner and means of your work, set your hours, and terminate you.
Running your own LLC or S-corp as the vehicle for your H-1B work is generally not viable unless that entity itself petitions for you and can independently demonstrate the control and corporate governance structures USCIS requires — a high bar that most solo consultants cannot meet, since you cannot credibly supervise yourself. Attempting to bill clients through your own entity while on H-1B sponsored by a staffing firm can jeopardize your status.
This is not a tax question. It is an immigration law question, and it needs to be answered by immigration counsel before your CPA ever opens a spreadsheet. If you are on H-1B and considering any entity structure, talk to an immigration attorney first, then loop in a CPA for the tax mechanics.
When the Entity Simply Is Not Worth It
Skip the entity, or stick with a plain LLC at most, if any of these describe you:
- You are early in a contract run and unsure it will last more than a few months.
- Your net consulting income is reliably under roughly $60,000-$80,000 a year — payroll and CPA costs will eat most or all of the self-employment tax savings.
- You are between contracts frequently and expect real bench time — payroll compliance obligations do not pause just because billing does.
- You are on a visa status that requires a direct employer-employee relationship with a sponsoring employer, including H-1B.
- You are working W-2 through a staffing firm and have no near-term plan to bill C2C.
Form the S-corp when the math is boring and obvious: steady six-figure-plus 1099 or C2C income, a CPA who has run the actual numbers for your state, and enough runway that a slow month does not turn payroll compliance into a scramble.
The Josh Pros LLC team talks through engagement models and entity questions with consultants regularly — we are not your CPA or your immigration attorney, but we can help you think through how a given structure fits a specific placement. Reach out at contact@joshpros.com or visit https://joshpros.com.
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