💵 Business Structure · California Contractors
How to Pay Yourself as a Contractor in California — LLC vs S-Corp
How you structure your contractor business directly impacts how much of your income you keep. Here’s the honest breakdown of your options — and which saves the most in taxes.
📞 Free Strategy Call: (818) 679-4451The 3 Ways California Contractors Pay Themselves
1. Sole Proprietor — Owner’s Draw
You simply transfer money from your business account to your personal account. The IRS calls this an “owner’s draw.” Simple, but you pay 15.3% self-employment tax on ALL net profits — even money you leave in the business.
✓ Pros
Simple setup, no payroll, no W-2s required
✗ Cons
Highest SE tax burden, no tax-free fringe benefits
2. Single-Member LLC — Still Owner’s Draw
A single-member LLC is a “disregarded entity” for federal taxes — the IRS treats it exactly like a sole proprietorship. You take an owner’s draw and pay SE tax on all net profits. The LLC gives you liability protection but doesn’t reduce your tax burden without an S-Corp election.
✓ Pros
Liability protection, professional credibility, same simplicity as sole prop
✗ Cons
Same SE tax burden as sole prop without S-Corp election. California charges LLCs an $800 minimum franchise tax annually.
3. LLC with S-Corp Election — Salary + Distribution
This is the tax-saving strategy most successful California contractors use above $80K net profit. You elect S-Corp status for tax purposes, pay yourself a “reasonable salary” (subject to SE tax), and take the remaining profit as an S-Corp distribution (NOT subject to SE tax).
Example Savings:
Net profit: $150,000 · Reasonable salary: $80,000 · Distribution: $70,000
SE tax savings on $70,000 distribution: ~$10,710/year
✓ Pros
Significant SE tax savings at higher income levels, retirement plan options
✗ Cons
More complex — requires payroll processing, W-2 filing, quarterly employer taxes, and additional CA franchise tax
Which Structure Is Right for Your California Contracting Business?
| Annual Net Profit | Recommended Structure | Reason |
|---|---|---|
| Under $50,000 | Sole Prop or LLC | S-Corp costs exceed savings at this level |
| $50,000 – $80,000 | LLC (evaluate S-Corp) | S-Corp may break even — run the numbers |
| $80,000+ | LLC + S-Corp Election | Strong SE tax savings typically $5K–$20K/year |
Does electing S-Corp status affect my CSLB license?
Not in a negative way, but you must update your CSLB records. The license must reflect your current business entity. If you form an LLC or corporation, you’ll need to apply for a new CSLB license under that entity or add it as a Responsible Managing Employee (RME). Bookkeeping Champs can guide you through this process.
What is a “reasonable salary” for an S-Corp contractor?
The IRS requires that S-Corp owner-employees pay themselves a “reasonable salary” — meaning what the market would pay for your role. For a working contractor-owner, this is typically $50,000–$90,000 depending on your trade, experience, and hours worked. Bookkeeping Champs helps establish and document your reasonable compensation amount.
Let Us Find the Right Structure for Your Contracting Business
Bookkeeping Champs helps California contractors choose and implement the right business structure to minimize taxes and maximize take-home pay. Free 30-minute consultation.
📞 Call (818) 679-4451Bookkeeping Champs · Los Angeles · Ventura County · Se Habla Español