Freelancers across the country face a common challenge: figuring out how to structure their business to minimize taxes without triggering compliance headaches. No matter where you are working, staying on top of the local and state taxes you are responsible for is a critical part of the complex tax trade-offs that can come with forming and operating your freelance business as an entity like an S corporation (S-corp) or limited liability company (LLC).

Now, under the new "Big Beautiful Bill" tax provisions, it is more important than ever to understand how you can optimize your tax strategy, taking into account all levels of tax: local, state and federal. Below is a breakdown of key considerations for doing so. However, remember that it is always wise to consult a tax professional, especially one  familiar with all of the tax regulations in your immediate local area, your state, and of course, on the federal level, too.

The Complete Freelance Tax Stack: Understanding Your Obligations

When you form a business entity, you’re not just dealing with federal income tax. You may also face:

• Self-employment taxes (Social Security and Medicare)
• State income tax
• Local business taxes (if applicable)
• Payroll taxes (if you pay yourself a salary)
• Potential loss of the Qualified Business Income (QBI) deduction

Each layer adds complexity—and opportunity. The goal is to structure your income in a way that balances tax savings with compliance and long-term financial health. 

S-Corp Strategy: Smart or Overrated? It May Depend on Your Local Tax Nexus

A common tax-saving strategy for freelancers who earn beyond a certain threshold is to transition their businesses to s-corporations to reduce their self-employment taxes. The idea is to split income between salary (subject to payroll taxes) and distributions (not subject to payroll taxes). This strategy isn’t always advantageous when you consider the potential loss of some local and/or state tax reduction benefits..

Consider a New York City (NYC) freelance business as an example. NYC imposes an Unincorporated Business Tax (UBT) of 8.875% on net income from partnerships and LLCs. That means even if you’re optimizing federally, you could be losing margin locally. And New York State doesn’t offer much relief on passthrough income, potentially making the savings minimal.

In other states, like Florida or Texas, where there’s no state income tax—making the S-corp strategy far more attractive. But even then, freelancers need to pay themselves a “reasonable salary,” which is subject to Social Security and Medicare taxes and doesn’t qualify for the QBI deduction.

K-1 vs. W-2: What’s the Real Benefit?

Only K-1 profits (distributions from passthrough entities) are eligible for the QBI deduction. W-2 wages are not. So if you’re trying to maximize your QBI benefit, you’ll want to minimize salary and maximize distributions—within reason.

But remember: salary is what allows you to contribute to retirement accounts like a Solo 401(k) or SEP IRA. It also builds your Social Security record. So the trade-off isn’t just tax—it’s long-term financial planning.

Top Tips to Optimize Your Taxes—Wherever Your Business Resides

There are a few universal strategies freelancers can use to stay ahead:

• Work with a local accountant who understands your state and city tax rules. What works in one jurisdiction may not have the same benefits in another.
• Set a reasonable salary if you’re an S-corp owner. Don’t overpay yourself, but don’t underpay either—IRS scrutiny is real.
• Maximize retirement contributions to reduce taxable income and build wealth.
• Track QBI eligibility and structure your income to take advantage of it.
• Consider location-based structuring if you have flexibility. Some freelancers operate entities in low-tax states while maintaining compliance with their home state’s residency rules.

Beware of All Tax Obligations Your Freelance Business is Subject To

Where your freelance business has a tax nexus truly does matter when it comes to your local and state taxes. Working with an experienced tax professional is the key to understanding how federal, state, and local taxes interact—and build a strategy that works for your goals, no matter where your business takes you!