Freelancers: LLC vs S-Corp vs Sole Prop in California

What to know

• Under ~$80k profit, sole prop + insurance often beats entity costs.
• $120k profit: LLC costs $800; S-corp costs ~$1,800 + payroll overhead.
• Liability shield has real value for client-facing work: don’t optimize tax to zero protection.

Three structures, real numbers

A California consultant netting $120,000 can operate as a sole proprietor (no entity cost, no liability shield), a single-member LLC ($800 a year plus the fee once receipts pass $250,000, with the same federal tax as a sole proprietor), or an S-corp ($800 minimum or 1.5% of profit, plus payroll). The LLC buys liability protection; only the S election changes federal self-employment tax, which runs about 15.3% on most self-employment income.

What changed for 2026 reporting

Clients now issue Form 1099-NEC only once they pay you $2,000 or more in a year (up from $600, for payments made in 2026), and payment apps send Form 1099-K only above $20,000 and 200 transactions. Fewer forms doesn't mean less tax: all of the income is still reportable, and quarterly estimates (California front-loads them 30/40/0/30) are still due.

When to add the S election

The payroll-tax saving comes from taking part of profit as distributions instead of salary. Once profit clearly exceeds a defensible market salary for your role, the saving usually outweighs payroll costs and California's extra $800-or-1.5%. Below that, the LLC is simpler.