Q: What are the pros/cons of incorporating if you're a writer?
Yay, taxes!A: The pros are that you save money. The cons are that you lose money.
And so life goes.
A large majority of working pros do choose to incorporate. They typically do so as a California State Subchapter S corporation, aka an “S-Corp” or “loanout”.
The idea of the loanout is that technically, you cease working for employers. From incorporation forward, you work for your corporation, which then loans out your services to employers. The companies pay your corporation, and your corporation then “pays” you (even though it’s all your money).
Forming an S-Corp costs money. There are some quicky services out there, but I recommend using a lawyer or certified financial planner with experience in this area. There are initial startup costs in which you fill out forms, create articles of incorporation, blah blah blah. On an ongoing basis, there are maintenance costs as well, like annual reports to the state (a paralegal can do this) and payroll service fees (because you actually need to pay yourself like an employee).
The benefits, however, are quite significant. In addition to tax savings that are something of a mystery to me (Alternative Minimum Tax savings and stuff like that), corporations can make contributions to qualified (read: retirement) plans that generate tremendous tax savings.
I’ve always heard the rule of thumb is that if you make more than $250,000 a year in writing income, incorporating will probably make financial sense for you. If you make much more than that, it’s an imperative.
However, I’m just a simple screenwriter. I don’t understand the tax code. The only person qualified to help you make this decision is your accountant or a good tax lawyer.
Oh…and for what it’s worth…my company’s name is The Craig Mazin Company, Inc.
Boring, right? And yet, it worked for some knucklehead named Walt Disney, so why the hell not?
I anxiously await the first CRAIG MAZIN theme park. :-)
i was really shocked to find out how much incorporating costs over there. is that true of all start ups? or just these “s-corp” ones?
i’m incorporated over here (well, i’m limited, actually) and it cost me £30 ($55) in fees. the paperwork was simple and i filled it all out myself.
wondering what it is about the american system that it’s so expensive.
You know, I’m honestly not sure. I suspect it’s about state regulations and the size of our economy. The more money at stake, the more paperwork a state generates. Lots of tax money at risk, and so forth.
Thanks for bringing this up, Craig. The tricky area is the 150-250K range. Less than 150, apparently it doesn’t make sense at all. More than 250, it definitely makes sense. But it’s impossible to get a straight answer in between the two, I guess because there is no straight answer.
Maybe I should start a thread on Writer Action or something to see what other people’s experience on this is. Because it’s kind of a tough decision to make.
It is a tough one. Still, I have to believe a good financial advisor could run the numbers and tell you what seems like the right course of action.
Incorporating is a greatidea, no matter how much you’re making, for a number of reasons. But one in particular: it’s much easier to deduct incoming money as expenses, thus lowering your taxable income. Just think about that “studio accounting” whereby they never show a profit; you do the same thing on a smaller scale.
For slightly lower incomes, you can get most of the same benefits without incorporating simply by creating a d/b/a and getting a business license for it, then running all your expenses and income through separate business bank accounts for the DBA. At this point in my career, that’s how I do it and I get substantially the same write-offs. The benefit is that I do not have to do separate tax returns for the business since it is just a d/b/a and I do not have to pay the minimum state tax on the corporation which, in CA, is $800. [Caveat: I am not an accountant or a tax attorney.]
Two major advantages of a corporation that a DBA does not afford: you get around the AMT, and you’re also able to invest tens of thousands of dollars in a retirement plan (thus lopping an enormous amount off your taxable income).
Isn’t another important function is that it isolates your personal assets from a legal standpoint (liability), i.e. your corporation, a separately existing entity, is the one entered into contracts, not you the person? So, if someone thought your screenplay stole from his book, and your screenplay was “commissioned” by your own corporation, your house and other personal assets would be protected?
Miles:
That would nice, wouldn’t it? :)
Alas, the courts are smarter than that. There’s a legal practice known as “piercing the veil” that essentially allows complainants to blow past the legal shield of the S-corp to get at the assets of the individual who runs it.
Furthermore, most studios require writers using loan-outs to sign something called an “inducement”, which essentially formalizes this accountability. An inducement essentially says that you, the individual, are guaranteeing that the corporation will provide your services, and will do so legally, etc.
“TAX DEFFERRED” COULD BE DEADLY.
Something too few people seem to be considering with regard to “tax deferred” things like retirement accounts. “Tax deferred” means you don’t pay taxes on your retirement income until you retire. But man when you retire you’re going to pay taxes on that income, and here’s the catch nobody seems to be looking at. It could VERY well be the case that you’re a LOT better off paying the taxes on your retirement savings now, while the taxes are comparatively very low. By the time a lot of us retire we’re going to be ass deep in a budget crunch where S.S. just doesn’t cut it, for anyone, it’s going to be beer and pizza money, but nuthin more. Pension plans are going to be going broke. People are going to find that the money in there 401k isn’t going to come anywhere close to providing what they thought it would. It’s going to be a mess. Now you can file this under “amazing Mike predicts”, but this is what I’m all but certain is going to happen by the time we retire. Those of us who have saved for retirement are going to wind up paying through the nose for those that didn’t. Why? Because it’s the right thing to do? Hell no. Because if we don’t there are going to be so many people bordering on starvation that if we don’t there’s going to be pure hell to pay. What I expect is dammed well GOING to happen is that all of us that opted for “tax deferred” status are going to be shocked at the fact that the tax rates we pay when we retire are double to triple what they would have been if we hadn’t deferred paying those taxes until we retire. It could VERY well wind up the case that we’re all a LOT better off financially paying the taxes on as much income as we can NOW, BEFORE the crunch comes, while the tax rates are considerably less than what they become by the time we retire and we’re in the middle of THE BIG CRUNCH.
Something to think about anyway imo.
Mike:
Your dire predictions aside, I don’t invest my retirement savings in other people’s retirement accounts (like 401ks and insitutional pensions).
I invest my retirement savings in my own qualified retirement plan, which is spread among investments of my choosing and is entirely managed by me.
I also have a pension that’s managed by the Writers Guild Pension & Health Fund, but that’s separate from what I personally contribute towards (the companies contribute towards that for me).
Mike:
Tax deffered means you can invest the tax money now. Compounded interest over time (20-30 years) will more than offset future tax hikes.
-Wil
Craig, thanks very much for introducing this under-discussed aspect of the writing business. The conversation generated by the “to incorporate or not to incorporate…” question helped clarifiy some of those decision points.
A couple of follow-up questions for you and the rest of the group, if I may:
Right now, there seems to be a lot of gymnastics involved with a check being cut to the agency, then the agency cutting a separate check to the writer, etc.
Are there any WGA resources that could help individual writers navigate the unique entertainment industry financial world? Or other sites/organizations that might have such industry-specific information?
Finally, asked only half in jest - so what’s the story with those “Incorporate in Tax-Free Nevada” services?
Thanks again for providing such a great forum for writers.
Tim
Great post.
I incorporated a few years ago and every year I think my accountant is ripping me off, until I see the numbers if I wasn’t incorp’d.
I’m saving on average about 10K a year being incorporated, not to mention putting all that pension money away for the future.
I work for a studio, and just want to let writers know that, if they chose to incorporate, do NOT set yourself up as an LLC (Limited Liability Corporation). The IRS now forces the studios to look through an LLC as if it didn’t exist and tax the worker directly. Only true, “Inc.” type corporations will work as loanouts these days.
Hi:
My lawyer has advised me to incorporate so that I won’t have to pay into social security, though I noticed nobody else mentioned that as a pro. The downside would be that I’m not building up my social security account, but given that program’s questionable future, that doesn’t worry me, especially if I take those funds and invest them in my own qualifed account. However, I’m still debating making this move or not.
.
Amy:
Typically, when you incorporate you engage a payroll service to pay money to you, the person, from the corporate entity.
Yes, it’s the equivalent of moving money from one account to another, but the IRS likes to see that you’re doing it. One of the benefits of this is that you do then have personal income that helps accrue Social Security.
Craig, Much of the responses contain good information but many are out of context, incomplete and some just wrong. First, typically it costs $1,000 to incorporate and there are additional annual costs to maintain the corporation. IMO - a writer should write and hire someone to handle these compliance issues. Most Business Managers (typically CPA’s with many writer clients) would provide the best guidance. The best question a writer can ask in deciding to Incorporate or Not is “Does it put more money in my pocket?” Using up to date tax software I created a program to answer this question. Good Luck, John Blakeman, CPA/Business Manager
John:
Thanks, and I agree, professional advice is always preferable.