Wednesday, July 12, 2017

Should You Incorporate Your Writing Business?

Writers usually think about characters, stories, and content. They don’t usually think about business entities. But when it comes to how you work, it’s important to consider the advantages and disadvantages of various entities you could create for your writing business. 

With this in mind, Writer Abroad has created a little cheat sheet for writers like her who are not business people. So read and consider, but then talk to an accountant or tax lawyer about your specific situation based on your country, city, and state to see what makes sense for you. Writer Abroad has been both a sole proprietorship and an S-Corp, so she knows first hand that there are advantages and disadvantages to having a writing business in either entity.

Become a CEO of your writing corporation–
and still wear your slipper boots.

Sole Proprietorship
If you write an article or do a project for someone and get paid for it, you are automatically considered a sole proprietor.

Benefits:
-It's the simplest entity: No official incorporation paperwork required (or fees to do so!)—just start working.
-You can deduct any expenses related to your work—including a portion of your monthly mortgage or rent payment if you work from home and have a designated office.
-You can create a Solo 401k and deduct up to 18k in retirement a year.
-You can deduct net business losses from personal income.

Downsides:
-Your personal and business lives are intertwined legally, meaning if someone takes you to court for something you wrote, your personal assets are also at stake.
-Self-employment taxes (U.S.) are over 15%. That’s on top of paying the tax in your income bracket. The first time you see your total tax bill as a sole proprietor, you will be shocked.
-Might not be the most tax advantageous entity if you make above a certain income (say 30k or more).

LLC
Benefits:
-Your profits pass through and taxes are paid personally.
-Your business is legally separated from your personal financials.

Downsides:
-More expensive to establish than a sole proprietorship (but worth considering for the legal protection it offers.)

S-Corporation
An S-Corporation is a special kind of corporation where business income, as well as many tax deductions, credits, and losses are passed through the owners, rather than being taxed at the corporate level. You must meet specific IRS requirements to create an S-Corp. First you file regular corporation paperwork, then you apply to be an S-Corp after that.

Benefits:
-Your business will be legally separated from your personal finances.
-If you make over a certain income level, you will save money on taxes because you won’t be paying 15% in self-employment taxes like a sole proprietor does. So someone making 100k, for example, could save around 5k in taxes. But you have to consider the costs of increased paperwork too.
-You have more flexibility. You can decide how much salary you get, how much retirement you put away (in some cases, you can deduct as much as 52k a year), and you have a lot of the benefits a regular corporation has, but on a smaller scale and without double taxation.
-You demonstrate your seriousness about your writing both to yourself and to others with a corporation.
-You'll become both a writer and a CEO. Sounds good at parties.
-You can hire employees or contractors like editors, book designers, translators, and more.

Downsides:
-You will need to hire a lawyer to help you incorporate. This can cost around $700.
-Yearly filing fees of $100 or more are required to maintain entity with the state.
-You will have a lot of increased paperwork and accounting, which means you may need to hire an accountant to help you manage payroll (even if it’s just you on payroll), taxes, and quarterly filings as well as things you never considered, like state employment security paperwork, which is filed quarterly too (and can cost around $400-500 a quarter just to insure yourself against unemployment). Try to get a CPA as they are the most qualified to do your accounting. Figure an accounting cost of about $130 a month, including a subscription to Intuit.

For further reading

Writer Abroad found the following books useful when she was determining her business entity:



Other writers have questions or entity experiences? Leave a comment.

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