Choosing the Right Business Entity for Gig Workers

If you recently joined the “gig economy,” know that you must meet certain tax obligations, just like any other business owner. This is true whether you’re a ride-share driver, landlord or participate in some other line of work. Typically, the most convenient option is to operate as a self-employed individual. Unless a sole proprietor makes another choice, he or she will be treated as self-employed.

This method of business ownership has its advantages, but in some cases, it may be preferable to form an S corporation for the business. An S corporation requires additional fees and paperwork but provides certain tax benefits not available to self-employed individuals. Let’s take a closer look at these two main options for gig economy start-ups.

Tax Angles for the Self-Employed

Regardless of the structure of your business, you must pay federal income tax, one way or another, to Uncle Sam. If you’re a sole proprietor, you must generally file Schedule C with the IRS by April 15 of the year following the tax year in question.* Like other individuals, you may obtain an automatic six-month extension to file your return, but there’s no extension to pay tax.

Because there are no withholding obligations, self-employed individuals pay their taxes in quarterly installments. The quarterly due dates are generally April 15, June 15, September 15 and January 15 of the following year.*

The income tax rates for self-employment income are the same as for other personal income. So, the lowest current tax rate is 10% and the highest is 37%. But self-employed individuals can also claim deductions for business expenses that can offset some of this tax liability. They range from depreciation-related deductions for qualified property placed in service during the year, including a generous Section 179 expensing allowance and first-year bonus depreciation, to write-offs for everyday supplies, travel, and vehicle expenses, and more. As usual, other special rules and limits may apply.

Notably, you can deduct 100% of your health insurance premiums for yourself, your spouse and dependents under age 27. This covers health insurance, dental insurance and long-term care insurance premiums, subject to certain limits. It doesn’t matter if your spouse or dependent works in the business or not.

In addition, as a self-employed individual, you may benefit from a tax-qualified retirement plan, just like the corporate bigwigs. The options include solo 401(k) plans, easy-to-administer plans such as SEP and SIMPLE plans, and Keogh plans, which are specifically designed for self-employed individuals. Contributions grow tax-deferred within generous annual limits.

A self-employed individual may also be eligible for the deduction for qualified business income (QBI) authorized by the Tax Cuts and Jobs Act (TCJA). Under a complex set of rules, the deduction is equal to up to 20% of QBI, but it’s phased out based on specific dollar thresholds. Lower threshold amounts apply to individuals engaged in a specific service trade or business where they provide personal services to the public, such as physicians, plumbers and interior designers.

Finally, self-employed individuals don’t have to pay FICA tax like regular employees. Instead, they’re responsible for paying self-employment tax at double the usual payroll tax rate. Accordingly, they must pay Social Security tax at a rate of 12.4% on the first $176,100 of self-employment income in 2025 and the 2.9% Medicare tax on all self-employment income. However, to offset this “double tax,” half of the self-employment tax payments are deductible on their returns.

Note that self-employed individuals are personally liable for their business activities. There’s no corporate veil to shield them.

Tax Angles for S corporation Owners

Unlike self-employed individuals, S corporations are taxed similarly to partnerships. Instead of the S corporation being directly taxed, items of income and loss are passed through to the S corporation owners, based on their ownership interest. All income and losses are passed through to a sole shareholder.

Thus, S corporations aren’t subject to “double taxation” like C corporations, where income is taxed at the corporate level and then again when distributions are paid to owners. However, the S corp still must file an annual return, Form 1120-S, generally by March 15 of the following tax year.*

The S Corp must also provide a Schedule K-1 to each shareholder. Shareholders then report the information on their K-1s on their tax returns.

An S corporation election is effective if made by the 15th day of the third month of the applicable year.* Thus, an S corp election made before March 17, 2025, is effective for the 2025 tax year. But the S corp election isn’t automatic. To qualify for S-Corp status, the following requirements must be met.

• The corporation must be a domestic corporation.
• It can have no more than 100 shareholders.
• It can have only one class of stock.
• The corporation can’t be an ineligible corporation, such as certain financial institutions, insurance companies and domestic international sales corporations.

To become an S corporation, all shareholders must sign Form 2553, “Election by a Small Business Corporation,” and submit it to the IRS.

Although S corporation owners pay tax on the wages they receive during the year from their corporation, they aren’t taxed on the full amount of corporate income. Nor do they have to pay FICA tax on the amounts they don’t receive as wages. Other distributions of profits are exempt from FICA tax. Furthermore, losses generated by an S corporation can be used to offset the other personal income of a shareholder. As a result, an S corporation is often viewed as a means to reduce overall tax liability.

But note that S corporations must pay the owners a “reasonable salary” based on the circumstances. Typically, this is dictated by the industry or profession and the prevailing compensation for business owners in the same geographic area. Rule of thumb: Many S corp owners rely on the 60/40 rule for this determination. In that case, 60% of the income is paid as wages and the remaining 40% is paid out as a distribution of profits.

S corporation owners may also be eligible for the QBI deduction as outlined above for self-employed individuals. This tax code provision is scheduled to expire after 2025, but it may be extended and enhanced by the “One, Big, Beautiful Bill” being hammered out in Congress.

Health care expenses paid by the S corporation are deductible and nontaxable to S corporation owners. So, shareholders can reduce their tax bills further by having the S corporation pay these expenses. As with self-employed individuals, S corporations can establish tax-qualified retirement plans within generous contribution limits.

Comparable tax rules apply at the state income tax level. This must also be taken into account before deciding whether the S corp approach is best for you. Finally, be aware that S corporation status offers protection from personal liability, unlike the sole proprietorship setup. However, protection may be limited when the business is under-capitalized.

New Reporting TPSO Rules in Limbo

Recent tax legislation has tightened tax reporting requirements for gig economy workers who receive payments from third-party settlement organizations (TPSOs), such as Venmo, PayPal and Zelle.

Previously, TPSOs were required to distribute Forms 1099-K to any business that had 200 or more transactions during the year and the total amount of the transactions exceeded $20,000. The limit was initially scheduled to be reduced to $600 in 2022, but was delayed and then gradually phased in. For 2025, reporting is required for transactions exceeding $2,500.

Similarly, Forms 1099-MISC are required for miscellaneous income, and Form 1099-NEC is required for non-employee compensation, both of which are currently required for payments exceeding $600. But this could change under the “One, Big, Beautiful Bill” now working its way through Congress.

A provision in the bill would raise the 1099-MISC and 1099-NEC reporting threshold to at least $2,000 in a tax year, indexed for inflation. The threshold for filing Form 1099-Ks would increase to more than $20,000 and 200 transactions, significantly reducing the reporting requirements.

Of course, these changes are far from a done deal. We’ll keep a close watch on new developments.

For More Information

Don’t make any knee-jerk reactions when deciding what’s right for your situation. Plus, other alternatives, such as a limited liability company arrangement, may be viable. Discuss your options with your professional tax advisors.

* When the due date falls on a holiday or weekend, the new due date will be the next business day.

Copyright 2025

This article appeared in Walz Group’s June 30, 2025 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.