U.S. Taxes & Incorporating (Yuk)
I've read some things on prior discussions that lead me to post this as a talking point. As a new author, I had to make decisions on how I should set up for taxes and in what name. On advice from my CPA and friend, I chose to set up a corporation name - Cosas Finas LLC - with my husband (we live in a community property state). My CPA did all the paperwork and made this transition easy for me.
If you want to separate your real name from your writer's life, you could set up a corporation name or pen name for your copyrights. I've seen authors do this, but your publishing contracts should reflect the names you are doing business under.
But here's the nuts and bolts of the tax angle----According to my CPA, if someone earns more than $25,000 per year, they risk overpaying on self-employment (SE) taxes. (An author friend of mine realizes this, but likes to take the refund she gets and travel with her husband. Personally, I'd like to keep the money I have up front, but again, this is a personal choice.) My CPA friend says he sees many SE people paying more in taxes than regular income tax.
According to him, the way it works (to avoid overpaying on SE tax) is this: An author or any SE person can file an election for an LLC to be taxed as a corporation. Corporations and their owners aren't subject to SE tax. Without this election, the LLC owners will definitely incur SE tax because the default status for single-member LLCs is sole-proprietor and for multiple-member LLCs is partnership, both of which subject their owners to SE tax.
According to him, understanding this election is critical.
In addition to this election (the 8832 election), he also recommends the 'S' Corp election (a 2553 election), so that the resulting corp tax return doesn't overpay tax. In other words, no "double tax" (both to the corp and to the owners). All taxable income flows through to the owners' 1040, but without SE tax.
Coming from an accounting background many years ago, this made sense to me and I wanted to share what I'd learned. Many of my author friends had not heard this and looked into it to make their own changes.
Anyone else have any thoughts?
If you want to separate your real name from your writer's life, you could set up a corporation name or pen name for your copyrights. I've seen authors do this, but your publishing contracts should reflect the names you are doing business under.
But here's the nuts and bolts of the tax angle----According to my CPA, if someone earns more than $25,000 per year, they risk overpaying on self-employment (SE) taxes. (An author friend of mine realizes this, but likes to take the refund she gets and travel with her husband. Personally, I'd like to keep the money I have up front, but again, this is a personal choice.) My CPA friend says he sees many SE people paying more in taxes than regular income tax.
According to him, the way it works (to avoid overpaying on SE tax) is this: An author or any SE person can file an election for an LLC to be taxed as a corporation. Corporations and their owners aren't subject to SE tax. Without this election, the LLC owners will definitely incur SE tax because the default status for single-member LLCs is sole-proprietor and for multiple-member LLCs is partnership, both of which subject their owners to SE tax.
According to him, understanding this election is critical.
In addition to this election (the 8832 election), he also recommends the 'S' Corp election (a 2553 election), so that the resulting corp tax return doesn't overpay tax. In other words, no "double tax" (both to the corp and to the owners). All taxable income flows through to the owners' 1040, but without SE tax.
Coming from an accounting background many years ago, this made sense to me and I wanted to share what I'd learned. Many of my author friends had not heard this and looked into it to make their own changes.
Anyone else have any thoughts?
Views: 74
Replies to This Discussion
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Permalink Reply by Bill Mehlman on
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A couple, which I'll put down in no particular order, since I'm not an orderly guy.
When you're doing the research, find out how much the annual incorporation or LLC fees are. Best of my recollection, here in NYS, I was paying $500/yr.
The debate over LLC vs. Sub-S is probably irrelevant in the earnings brackets most writers occupy. I think.
Even though the income passes through the LLC/Sub-S, so there's no double taxation, bear in mind that you still have to file a return for the LLC/Sub-S. Either you do it or you pay someone else to do it.
A big reason for incorporating is to avoid liability. For example, my last LLC was my catering company. Food service is a lush field for the ferrets, which is to say lawyers. Lots of "I got sick from the fish and I don't care if none of the 149 other guests did, I'm suing your ass." Not so much of a risk in writing, especially if you steer clear of the libel and plagiarism statutes.
Personally, and I do mean personally, I've never met anyone who overpaid his/her SE taxes. The opposite is much more likely to be the case, in my experience. Particularly in my experience. I always either forget to file or remember but don't have the funds. For those of you who don't understand the ramifications of this: if you work for XYZ Widgets, Inc., and your employer withholds, HE pays half the Social Security/Medicaid (Medicare??? Sorry). If you're self-employed, you pay both halves.
Should you decide to incorporate, do it yourself. I did my last one, online, and it took me about 20 minutes. At least here in the Empire State, they make it real easy.
I'm outta breath, and outta beer. Hope this has been helpful. The usual disclaimers, of course, apply bigtime: I'm not a CPA, JD, LLB, LLD or anything else like that.
Best scenario: become the next Grisham/Patterson/Grafton, and don't sweat this stuff.
Bon chance.
Bill
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Permalink Reply by Jordan Dane on
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I'm having a cyber beer with you, Bill. And leaving this to my CPA.
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Is that like, say, an O'Doul's? Pass.
How about a shot of Maker's Mark and a short Bud?
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What's the point of an O'Doul's? You don't look like the kind of guy who's ever seen the bottom of a glass once filled with a Shirley Temple. Maker's Mark and Bud it is!!
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I have too seen the bottom of a Shirley Temple. Once I was at a restaurant and a kid at the next table drank one and I happened to glance over there as he turned the glass up to get the cherry.
I hate sweet cocktails, anyway.
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