1099 vs. LLC: What’s the Best Setup for Your Contracting Business?

Disclaimer: The information provided in this blog is for general informational purposes only and should not be considered tax, legal, or financial advice. Tax laws and business regulations vary by state and can change over time. Before making any decisions regarding your business structure or tax obligations, consult with a qualified accountant, tax professional, or legal advisor in your state to ensure compliance with local laws and regulations.

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If you're running your own contracting business, or thinking of starting one, you’ve probably asked yourself at some point: Should I set my business up as a 1099 contractor, or should I set up an LLC?

The short answer? It depends on a lot of things.

The long answer? Well, that’s what we’re here to break down.

Both options have their pros and cons, and while taxes are a big part of the decision, there are also liability concerns, paperwork headaches, and even how you feel about running your business (yep, that matters too). Let’s get into it.

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1099 Contractor: The Simple Approach

If you're a 1099 independent contractor, you’re self-employed in the eyes of the IRS. That means clients pay you directly, no taxes are withheld from your income, and at the end of the year, you get a Form 1099-NEC (instead of a W-2 like employees do).

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What does that mean for taxes?

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• You pay income tax just like everyone else.
• You also pay self-employment tax (which covers Social Security and Medicare), and this can sting a bit—15.3% right off the top. Employees split this with their employer, but since you are the employer, you’re on the hook for the whole thing.
• Taxes aren’t taken out of your checks, so you have to pay estimated taxes four times a year (April, June, September, and January). Miss these, and the IRS won’t be happy.

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💡 Perk: You can deduct a lot of business expenses—mileage, tools, home office, software, and anything else you need to run your business.

💡 Downside: No liability protection. If something goes wrong on a job and a client sues you, your personal assets (house, car, savings) are fair game.

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For a lot of small contractors, the 1099 route works fine, especially if you’re solo and planning on keeping it that way and keeping things simple. But if you’re growing (or planning to grow), hiring people, or just want to protect yourself better, an LLC might be the way to go.

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LLC: A Little Bit More Work, A Lot More Protection

A Limited Liability Company (LLC) is a legal business structure that separates you from your business. This means if someone sues your company, they’re suing the business—not you personally. Your house and savings? Safe (mostly).

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How LLCs Are Taxed

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Here’s where things get a little more complicated. An LLC can be taxed in a few different ways:

1️⃣ Default Sole Proprietor (if it’s just you)

• You still pay self-employment tax (15.3%).
• You still report income on your personal tax return (Form Schedule C).
• The main benefit here is the liability protection, not tax savings.

2️⃣ Partnership (if you have multiple owners)

• Same as above, but you file a partnership tax return (Form 1065).

3️⃣ S Corporation (optional, but potentially a tax saver)

• Here’s where the tax benefits kick in.
• You pay yourself a reasonable salary (which gets taxed normally), but anything beyond that can be taken as a distribution—which isn’t subject to self-employment tax.
• This can save thousands in taxes if you’re making good money (think $75K+ in profit).
• Requires a bit more paperwork and payroll setup, but could be worth it.

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💡 Perk: You get liability protection, and if you elect S-Corp taxation, you might save a good chunk of money on taxes.

💡 Downside: More paperwork, more annual fees, and more administrative work.

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Which One Is Right for You?

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Stick with 1099 if…
✅ You’re solo and keeping things simple.
✅ You’re not making enough yet to justify the hassle of an LLC.
✅ You don’t have much liability risk (e.g., you’re not doing high-risk work).

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Consider an LLC if…
✅ You want personal liability protection (especially if you have employees or work on expensive jobs).
✅ You’re making good money and want to explore S-Corp tax savings.
✅ You want a more professional image for your business.

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Final Thoughts: Taxes Matter, But So Does Peace of Mind

Taxes are only one part of the decision. The real question is:

• Do you need liability protection?
• Do you want to set yourself up for growth?
• Are you making enough to justify the extra work of an LLC?

If you’re not sure, talk to a tax pro or business advisor before making a decision. And if you’re just starting out? Don’t overcomplicate things—1099 is fine until you grow into something bigger.

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Useful Resources:

• IRS Guide: Independent Contractor vs. Employee
• IRS Self-Employed Tax Center
• How to Form an LLC (SBA)
• IRS Guide on S-Corp Elections

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If you’re in any way unsure about your situation, reach out to a professional in your state to get personalized guidance and advice.

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