If you are a gig worker, you might have seen this headline and thought “How does incorporating apply to me? I’m not a business.” Now that you understand what it is like to file a Schedule C as a gig worker, you might think about turning your gig jobs into a business.
A gig worker could continue as a Schedule C filer for tax purposes or that worker could incorporate into a limited liability corporation, an S corp, or a C corp. Each classification has legal and tax advantages and drawbacks.
Sole proprietor option
As a Schedule C filer, or sole proprietor, you and your business are inseparable. You are personally liable for any litigation that could be filed against you in, for example, a contract dispute.
A sole proprietor has the easiest taxes to complete, but doesn’t get to take any advantage of corporate income tax laws that LLCs, S Corps, or C corps get on their profits. Additionally, a sole proprietor does not have to complete extra paperwork that involves notifying regulators such as the IRS or the Oklahoma Secretary of State when shutting down.
Any business must file for transaction taxes such as sales taxes if the business produces goods that are normally subject to sales tax. The Oklahoma Tax Commission has resources to determine if your business needs a sales tax permit, the proper sales tax rates to charge in each area of Oklahoma, and how to file a sales tax report and remit collected sales taxes at tax.ok.gov.
In Oklahoma, all types of businesses must register with the Oklahoma Secretary of State’s office. If you decide to incorporate, you need to apply for a Federal Employee Identification Number with the IRS and apply for a quarterly income tax withholding account with the Oklahoma Tax Commission.
LLCs, or Limited Liability Corporations, are entities that may be owned by one or more owners.
If a liability arises, such as an incident requiring litigation, only the LLC’s assets are at stake. Any LLC owner’s personal assets will not be at risk in these matters. A single-member LLC may still file income taxes on a Schedule C which can simplify tax matters. An LLC can also be an S corp, a C corp, or a partnership.
An S corp is a type of corporation that may sell shares of itself to other people, but the number of owners of an S corp is limited to a number set by law. S corps also have restrictions on who can own S corp shares. As with an LLC, an S corp’s liabilities will not pass to any owners of the S corp. An S corp will file its own income tax return.
A C corp is also a type of corporation that may sell shares of itself, and it is the only type of entity that may sell shares of itself on an open market like a stock market. A C corp also must file its own income tax return. C corps get better corporate tax rates than other legal entities, but any dividends from C corps are subject to both corporate income taxes and household income taxes.
LLCs, S corps, and C corps all must register with a state government if they aim to do business in a state. The laws on incorporation vary from state to state.
LLCs, S corps, and C corps all require more paperwork and filing with various government entities, which is a big drawback compared to sole proprietorships. All of these require quarterly filings with government agencies such as the IRS and Oklahoma Tax Commission as well as other governments mentioned earlier.
LLCs, sole proprietorships, partnerships, S corps, and C corps all have advantages and drawbacks. The entity type that works for some businesses may not work for other businesses.
There are other advantages and drawbacks to each type of business entity that are not mentioned in this article.
For a better discussion on what kind of business entity your gig work needs, please consult a tax professional. A tax professional can help you answer more detailed questions that this article does not answer. A tax professional can also help you maintain your business to stay compliant with any and all business regulatory agencies, such as the IRS and the Oklahoma Tax Commission.
If you plan on continuing gig work, or even if your business allows you to expand your work, changing the way you file taxes should be something to consider as you continue working.
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Last Updated March 4, 2021, 10:28 AM by Brett Dickerson – Editor