Consulting income is easy to earn and easy to under-plan for. Clients pay gross, nobody withholds, and a good year can produce a bigger tax bill than expected. Add multiple clients, travel, and sometimes multiple states, and the return needs real attention. Here is how it fits together.
Start with how you are set up
- Sole proprietor or single-member LLC: income and expenses go on Schedule C, with self-employment tax on net profit. See single-member LLC tax filing.
- S corporation: the business files Form 1120-S and you take W-2 wages plus distributions. See S-corp tax return filing.
- Multi-owner firm: partnership or S corporation, with K-1s.
1099 income and what to reconcile
Clients that pay you $600 or more may send a Form 1099-NEC, though reporting thresholds have changed in recent legislation, so confirm the current rule. Whether or not you receive a form, all income is taxable. Reconcile the 1099s to your invoices and deposits before filing, because the IRS matches the forms to your return. Differences, such as reimbursed expenses included on a 1099, should be explained in your records.
Estimated taxes
Consulting income needs quarterly estimated payments covering income tax and self-employment tax. A large project payment can create a large tax liability in one quarter. Set aside a percentage of every payment. See quarterly estimated taxes for LLC owners and how much to set aside for business taxes.
When an S corporation makes sense
Consultants often have high margins and few expenses, which is the profile where an S corporation can reduce self-employment tax. The trade-offs are payroll, a separate return, and the requirement to pay a reasonable salary for the services you personally perform. In a consulting business, your own work generates nearly all the revenue, so the IRS may expect a substantial salary. See S-corp reasonable salary and LLC taxed as S corp.
The qualified business income deduction
Eligible pass-through income may qualify for the qualified business income deduction. Consulting is generally treated as a specified service trade or business, which means the deduction phases out or is limited at higher taxable income levels. The thresholds and rules change, so ask your preparer how they apply to your income and how S corporation wages affect the calculation.
Deductible expenses for consultants
- Software, subscriptions, and equipment.
- Professional development, certifications, and association dues.
- Travel to client sites, with lodging, transportation, and limited meals. Keep receipts and the business purpose.
- A home office, if you meet the regular and exclusive use requirement.
- Health insurance and retirement plan contributions, claimed according to your entity type.
- Contractors and subcontractors, with W-9s on file.
- Insurance, including professional liability.
- Marketing and professional fees.
Working in more than one state
If you perform services while physically in another state, that state may tax the income, and you may need a nonresident return. Some states also tax based on where the client benefits from the service. Rules differ, and some states have de minimis thresholds. Track the days you work in each state and where each client is located. If you have employees in other states, see multi-state payroll taxes.
Foreign clients
Income from clients outside the United States is generally still taxable, and you may need documentation from them about withholding. Keep contracts and payment records, and ask your preparer how foreign tax or currency issues apply.
Bookkeeping that supports the return
- Invoices tied to deposits, with a clear client-by-client revenue report.
- Receipts for travel and larger expenses.
- A mileage log for vehicle use.
- A tracked schedule of retainers, deposits, and unbilled work.
- Monthly reconciliation. See monthly bookkeeping checklist.
Our tax preparation service and tax planning service work with independent consultants and consulting firms. To schedule a business tax planning consultation, tell us your net profit, number of clients, and the states you work in.
