I am currently in the process of going full time performing magic. I will not be working for any one particular company, I will be doing magic for hire. For those of you that do that, what options offer the best tax advantage, Sole proprietor, LLC, or other options I do not know about.
Any help would be great. Also if there are any books out there on this topic, I would appreciate that.
Thanks
Tax Setup
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Guest
Re: Tax Setup
You can probably find the answers in just about any "Start your own business" book.
What I've learned (non-magic) is that if you simply work for yourself, you pay income tax, as well as a "self employment" tax that makes the bite even deeper. It also makes you more susceptible to auditing by the IRS.
If you form a corporation and have all money go to the corporation instead of you, the corp can pay you for performing. You then file personal income tax on what the corp paid you. The difference is, as far as the corporation is concerned, paying its employees is a business expense so they can write it off.
In the end, you pay less tax because you only pay once, bypassing the self employment tax, and the corporation files taxes as well, but they can write off things that you couldn't do yourself.
Here's a very elementary example:
You earn $50,000
If you're self employed you pay personal taxes on $50,000 and an additional self employment tax which could add thousands to your total tax bill.
The corporation earns $50,000
The corporation pays its employee (you) $50,000
You pay personal tax on $50,000
The corporation pays taxes on it's income (after expenses) of $0.00
30% of zero is zero. To me that's a much better deal. Forming a corporation will cost you some money too. But if I'm not mistaken, that's deductable as well.
But please don't take my word for it. I don't understand it fully either. All I know is I paid $5000 to the IRS in fines when I worked for myself. My wife (president, secretary and treasurer of a one-person corporation)made less money that same year overall and got a refund check of over $2000!
What I've learned (non-magic) is that if you simply work for yourself, you pay income tax, as well as a "self employment" tax that makes the bite even deeper. It also makes you more susceptible to auditing by the IRS.
If you form a corporation and have all money go to the corporation instead of you, the corp can pay you for performing. You then file personal income tax on what the corp paid you. The difference is, as far as the corporation is concerned, paying its employees is a business expense so they can write it off.
In the end, you pay less tax because you only pay once, bypassing the self employment tax, and the corporation files taxes as well, but they can write off things that you couldn't do yourself.
Here's a very elementary example:
You earn $50,000
If you're self employed you pay personal taxes on $50,000 and an additional self employment tax which could add thousands to your total tax bill.
The corporation earns $50,000
The corporation pays its employee (you) $50,000
You pay personal tax on $50,000
The corporation pays taxes on it's income (after expenses) of $0.00
30% of zero is zero. To me that's a much better deal. Forming a corporation will cost you some money too. But if I'm not mistaken, that's deductable as well.
But please don't take my word for it. I don't understand it fully either. All I know is I paid $5000 to the IRS in fines when I worked for myself. My wife (president, secretary and treasurer of a one-person corporation)made less money that same year overall and got a refund check of over $2000!
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Guest
Re: Tax Setup
Chris,
It can be mind-boggling to start a business if its all new to you. There are many books which address the kinds of questions you have, so do some browsing at your local B&N, etc. Also, you can probably find many online resources for free. Search google with terms like starting your business and tax considerations, etc.
Based on my experience, I wouldnt jump to forming a corporation. Actually, in a normal (i.e., not a subchapter S) corporation, you (as the shareholder and employee) ultimately get taxed twice, once at the corporate level and once at the personal income level. Also, if you are a legitimate business, whether you run a sole proprietorship or a corporation, Im not so sure that running a corporation really gets you significantly greater tax breaks. If its a legitimate business expense, my guess is that you can deduct it regardless of the ownership structure you select. For example, yes, as a sole proprietor, you do pay a bigger chunk of social security (FICA) taxes, but you get to deduct those increased costs as a business expense.
For me, the key consideration in determining ownership structure is not so much driven by tax considerations (although those are important), but asset protection. Why do so many individuals and very small groups of business partners form corporations, limited partnerships, or limited liability companies? Well, I think if you asked them for the number 1 reason why they do so, for most of them it would be that they can protect their personal assets from being taken in the event their businesses go belly up.
As to the chance of getting audited depending on what ownership structure you select, you should be able to learn about the audit oddsmaking online or from the books you consult.
None of the foregoing is legal advice, which raises my last point. Ive seen many people kick themselves for not hiring a lawyer and/or experienced accountant when they made these important decisions. As one friend has characterized it when it comes to being cheap on the frontside of lifetime decisions, pay me now or pay me later.
Good luck, and whatever you do, dont rush into your decisions.
Clay
It can be mind-boggling to start a business if its all new to you. There are many books which address the kinds of questions you have, so do some browsing at your local B&N, etc. Also, you can probably find many online resources for free. Search google with terms like starting your business and tax considerations, etc.
Based on my experience, I wouldnt jump to forming a corporation. Actually, in a normal (i.e., not a subchapter S) corporation, you (as the shareholder and employee) ultimately get taxed twice, once at the corporate level and once at the personal income level. Also, if you are a legitimate business, whether you run a sole proprietorship or a corporation, Im not so sure that running a corporation really gets you significantly greater tax breaks. If its a legitimate business expense, my guess is that you can deduct it regardless of the ownership structure you select. For example, yes, as a sole proprietor, you do pay a bigger chunk of social security (FICA) taxes, but you get to deduct those increased costs as a business expense.
For me, the key consideration in determining ownership structure is not so much driven by tax considerations (although those are important), but asset protection. Why do so many individuals and very small groups of business partners form corporations, limited partnerships, or limited liability companies? Well, I think if you asked them for the number 1 reason why they do so, for most of them it would be that they can protect their personal assets from being taken in the event their businesses go belly up.
As to the chance of getting audited depending on what ownership structure you select, you should be able to learn about the audit oddsmaking online or from the books you consult.
None of the foregoing is legal advice, which raises my last point. Ive seen many people kick themselves for not hiring a lawyer and/or experienced accountant when they made these important decisions. As one friend has characterized it when it comes to being cheap on the frontside of lifetime decisions, pay me now or pay me later.
Good luck, and whatever you do, dont rush into your decisions.
Clay
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Guest
Re: Tax Setup
Thank you both so much for your insight. I am looking to talk with an accountant to help in the process. If any others have any suggestions or personal preferences I would appreciate it. Also if you have any thoughts on starting a magic business in general I would love to hear about that as well.
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Guest
Re: Tax Setup
My accountant is a CPA, an attorney, a magician and a musician. He has saved me a bundle. That's the kind of person you need. He knows the IRS code as well as anyone there, but more than that, he knows how the IRS operates.
And he isn't afraid to go head to head with them.
He owns his own accounting firm. If you want more info, drop me an e-mail.
And he isn't afraid to go head to head with them.
He owns his own accounting firm. If you want more info, drop me an e-mail.
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Guest
Re: Tax Setup
Nolo Press (www.nolo.com) has an excellent book on starting a small business. It can help you sort out the different types of corporations. Not all of them get taxed as was described earlier in this thread. (I'm thinking of LLC and "S" type corporations in particular.)
In terms of taxes, be aware that unless your tax preparer is an "enrolled agent" they can't represent you to the IRS. They can prepare your forms, and coach you, but YOU will be the person dealing with the IRS if you get audited. An enrolled agent is worth the expense, in my opinion.
In terms of taxes, be aware that unless your tax preparer is an "enrolled agent" they can't represent you to the IRS. They can prepare your forms, and coach you, but YOU will be the person dealing with the IRS if you get audited. An enrolled agent is worth the expense, in my opinion.
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Guest
Re: Tax Setup
Careful now, a limited liability company ("LLC" for short) is not a corporation -- it's a limited liability company. One mustnt confuse shareholders with members. ;)I'm thinking of LLC and "S" type corporations in particular.
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Guest
Re: Tax Setup
Good for you, Bill.
It's best not to mix terms, it could result in a nasty surprise for those who are shopping around. A "registered" agent is an accountant who is licensed by the state. An "enrolled" agent can represent you during an IRS audit. The two terms are not synonymous.
It's best not to mix terms, it could result in a nasty surprise for those who are shopping around. A "registered" agent is an accountant who is licensed by the state. An "enrolled" agent can represent you during an IRS audit. The two terms are not synonymous.
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Guest
Re: Tax Setup
All I know is that Sam is licensed to represent me in the rare case that I need an audit.
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Guest
Re: Tax Setup
My company Commercial Operations, LLC has been run for years as a successor to both Sub S and full corporations I have operated under. I use a CPA to keep me straight with IRS.
ONE DOWNSIDE to operating as a business is insurance. If youy operate as a business from your home, remember your props etc. are not covered by your homeowners -- they must be under a business policy. Travel inland marine policies are expensive if you perform out of the home......
The organizations (IBM, SAM) policies are liability policies...and are pretty limited and do not cover your physical losses of props, staging, etc.
ONE DOWNSIDE to operating as a business is insurance. If youy operate as a business from your home, remember your props etc. are not covered by your homeowners -- they must be under a business policy. Travel inland marine policies are expensive if you perform out of the home......
The organizations (IBM, SAM) policies are liability policies...and are pretty limited and do not cover your physical losses of props, staging, etc.