Entity Choice, 1099 Income and Quarterly Taxes for GovCon Consultants

Leaving a W-2 role to consult is usually a good decision. I say that often. The trouble is the order. The decision comes first, and the tax structure gets built after it.

Your employer used to handle withholding, payroll tax and benefits. Each of those is now yours. Here is the order I would work through it.

Questions I help executives answer

01 “What changes the day I become a 1099 consultant?”

You pay both halves of payroll tax, and nothing is withheld.

Social Security tax is 12.4 percent up to the 2026 wage base of $184,500. Medicare tax is 2.9 percent on all net earnings. An additional 0.9 percent Medicare tax applies above $200,000 for single filers.

1. Open a separate savings account for taxes.
2. Move a fixed percentage of every payment into it the day the payment lands.
3. Revisit the percentage after your second payment, once you see real numbers.

02 “Do I need an LLC or an S corporation?”

The entity changes self-employment tax and paperwork. It does not change what you earn.

A sole proprietorship or single-member LLC pays self-employment tax on all net profit. An S corporation pays you a reasonable salary through payroll, and the remaining profit passes through as distributions that are not subject to self-employment tax. A C corporation rarely fits a consultant who wants the profit as personal income.

1. Estimate your annual net profit.
2. Compare the payroll tax an S election would save against the added payroll filings, a separate return and any state costs.
3. Elect S status only when the saving is larger than the cost.

The exception is salary. The IRS expects it to be reasonable for the work you do, and low salaries get examined.

03 “How much do I pay each quarter?”

Estimated payments are due April 15, June 15, September 15 and January 15. The penalty-safe amount is the smaller of two figures: 90 percent of this year’s tax, or 100 percent of last year’s tax. If last year’s adjusted gross income was above $150,000, the second figure is 110 percent.

1. Take last year’s total tax from your return.
2. Multiply by 110 percent if your income was above $150,000.
3. Divide by four.

The harder part is a first year with no prior self-employment history, because last year’s tax came from a W-2. That tax can run well below your new liability.

04 “Do I still get the 20 percent pass-through deduction?”

Maybe not in full. Consulting is generally a specified service business. The deduction phases out above taxable income of roughly $200,000 for single filers and $400,000 for joint filers in 2026. An executive leaving a high salary often lands near or over that line. Confirm your number before you count on it.

05 “Where does my retirement money go now?”

A solo 401(k) usually fits a consultant with no employees. For 2026 you defer up to $24,500 as the employee, with catch-up amounts at 50 and older. The business adds an employer contribution of up to 25 percent of compensation. The total limit is $72,000 before catch-up. A SEP IRA is simpler to open but has no employee deferral. An HSA paired with a qualifying plan adds a deduction, with 2026 limits of $4,400 for self-only and $8,750 for family coverage.

1. Open the solo 401(k) before the end of the year you want to use it.
2. Choose the deferral and employer contribution split.
3. Fund the HSA if your health plan qualifies.

The first month, in order

Confirm the contract. Form the entity. Open the business and tax accounts. Set up the retirement plan and health coverage. Put the four tax dates on your calendar.

Tax rules and thresholds change, so confirm the details with a CPA. I coordinate the planning around the structure you choose.

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