Consultant Tax Planning and S-Corp Election

Consultants and advisors typically combine W-2 and 1099 income, creating both opportunities and complexity. An S-corp election can significantly reduce self-employment tax on consulting revenue.

S-corp election for self-employment tax savings. As a sole proprietor, you pay 15.3% SE tax on all net income (12.4% Social Security up to the wage base, plus 2.9% Medicare on everything). Electing S-corp status lets you pay yourself a "reasonable salary" and take the remaining profit as distributions not subject to SE tax. On $300,000 of net income with a $150,000 salary, the SE tax savings can exceed $15,000 annually.

Home office deduction. If you use a dedicated space in your home regularly and exclusively for business, you can deduct a proportionate share of rent, mortgage interest, utilities, insurance, and depreciation. The simplified method allows $5 per square foot up to 300 square feet ($1,500 maximum), but the actual expense method often yields a larger deduction.

Travel and business expense deductions. Client travel, professional development, conferences, software subscriptions, and professional liability insurance are all deductible. Meticulous recordkeeping is essential -- the IRS requires contemporaneous documentation for travel, meals, and entertainment.

Retirement plan flexibility. Self-employed consultants can establish a Solo 401(k), SEP-IRA, or defined benefit plan. A Solo 401(k) allows up to $69,000 in total contributions (2026), and a defined benefit plan can shelter even more -- potentially $275,000 or more per year depending on age.

The tradeoff: The S-corp election saves SE tax but adds payroll compliance costs, mandatory reasonable salary analysis, and a separate tax return (Form 1120-S). The savings must outweigh the administrative burden.