How Does the New Tax Reform Affect You as an Actor?
Are you confused or worried about how the new tax reform will impact you? Here’s an insight into the good, the bad, and what you need to know. Also, I’ll be reviewing the benefits and costs of creating a corporation for yourself.
We talked with Sharon Gilday, CPA, an accountant who specializes in the Entertainment Industry, Tour Accounting, National and International Taxation and Business Management, to help us iron out the details. A lot of the regulations coming out right now are general, but here’s what we know so far.
The Basics: The Good & the Bad
The federal government’s new regulations state that employee expenses not reimbursed by the employer (which for actors is generally all of your headshots, commissions, classes, etc) are going to be limited or not deductible at all (bad news). Instead, they are trying to give a larger standard deduction. In 2017 and previous years, the standard deduction has been approximately $6,000. With the new tax bill this number may now jump to $12,000.
This is the good news. Why?
From Sharon’s sources, the IRS is doing this partly to have fewer audits, because Form 2106 (the form you submit as an individual for expenses not reimbursed) is one of the most audited forms out there. This is part of an effort to make things easier, under the assumption that most people wouldn’t have more than $12,000 worth of expenses to deduct anyway.
If you do have deductions well over $12,000, it might make sense for you to start a loan-out corporation so that you would still be able to deduct those expenses.
What is a loan-out corporation?
A loan out corporation can take many different forms, common examples are LLC, a C-corporation or an S-corporation. These legal business entities are established in order to provide the personal services of its owner/employee to third parties. The company “lends” its services by making contracts with the users of those services.
For actors, Sharon recommends opening an S corporation.
Why an S corporation versus a C-corporation or single-member LLC?
In S-corporations, owners are not required to pay corporate income tax on the profits of the company, therefore enabling them to avoid double taxation. Whereas in C corporations, the profits must be taxed separately from its owner(s), making double taxation unavoidable and limiting the owners’ financial liabilities.
When it comes to LLCs, they only file business tax returns if it has more than one owner and instead business profit or loss is passed-through to owners’ personal tax returns and, as mentioned previously, making your chance for an audit much higher. With an S corporation, you must file a completely separate business tax return lowering this risk for audits.
Another reason to favor S corporations for actors is that you can get a bit more creative with it from a tax perspective.
For example, let’s say you do have a profit. With an S corporation, part of your profit must be funneled into a payroll check, and the other part of your profit is just earnings and profits that go to you as the owner. In this sense, you are two people. You’re the worker and the owner. The worker has to get a W-2, and the owner gets earnings and profits.
How you can save money with an S-Corporation
It’s important because you’re going to pay more taxes on the W-2 side since you have to pay all this Social Security and Medicare, whereas, on the earnings and profit side, it’s just straight, ordinary income. You don’t pay Social Security and Medicare on that, which is a 15.3% savings.
When you have an LLC and it’s on a Schedule C on your personal tax return, you are paying Social Security and Medicare on 100% of those profits. Whereas with the S corporation, you can split it. The idea is that you can pay all the taxes that you need to pay for the corporation through your payroll check.
For example, let’s say your net profit from your acting was $20,000. If you had an LLC or a sole proprietorship (unincorporated), you’d be paying roughly $3,000 just in Social Security and Medicare. That’s not counting income taxes. If you had an S-corporation, you could do a $10,000 payroll check and the other $10,000 would be in distribution from earnings and profits. In this scenario, you’d only pay Social Security and Medicare on the $10,000 payroll check (so $1,500), which saves you $1,500 total.
Does it make sense for me to start an S corporation?
For most people, it doesn’t make sense to incorporate until you’re netting over about $119,000 a year, but there are other reasons that you might want to incorporate. If you’re doing other business as an independent contractor in the same industry, you can operate under that umbrella instead of getting a 1099. That way, you can have everything go through the corporation, simplifying the process for you as an actor.
How can I start my S corporation?
Sharon recommends using HubCo (https://www.inc-it-now.com/) to incorporate in any state Through this service, the cost for a California corporation is $369.90, and that gets you your corporate book, your seal, and all of your documents. In California, there’s a minimum tax of $800 a year, whether or not you make a profit, plus another $25 for the statement of information that you need to file with the Secretary of State every year, coming to a grand total of $825. Using HubCo, you would create a C corporation and do what’s called an S election, effectively turning your C corporation into an S corporation.
What category should I file my S corporation under?
When registering your corporation, it’s recommended for actors to register under the Entertainment category. Try to avoid listing your corporation under the Production Company category. Production Companies are audited more often and there are many different things in the Entertainment field that you could use that category for, so why limit yourself and call it a Production Company?
For those of us who are not netting over $119,000 and won’t be starting an S or C corporation, do you suggest we do our taxes ourselves or should we see a tax preparer?
At this level, you might do your taxes on your own. That being said, if it’s something you’re just not comfortable doing, you can 100% see a tax preparer.
Affordable & Free Services:
The Volunteer Income Tax Assistance (VITA) program offers free tax help to people who generally make $54,000 or less, persons with disabilities and limited English speaking taxpayers who need assistance in preparing their own tax returns. Learn more and find a VITA site near you at: https://www.irs.gov/individuals/free-tax-return-preparation-for-you-by-volunteers
TurboTax, #1 best-selling tax preparation software to file taxes online www.turbotax.com
IRS Free File or Fillable Forms: Use IRS Free File if your adjusted gross income is $66,000 or less. If you are comfortable doing your own taxes, try Free File Fillable Forms. Learn more here: https://www.irs.gov/filing/free-file-do-your-federal-taxes-for-free
Inc-It-Now.com, a Hubco Inc. company, can help you incorporate your standard corporation, non-profit, or limited liability company (LLC). https://www.inc-it-now.com/
Sharon Gilday, Down to Earth (Accounting & Tax Services in Woodland Hills, CA): (818) 999-1162
Please comment or share this blog if you found this helpful!
-Ana, Career ACTivate Team
PS. Don’t miss out on our complimentary online training, FROM PASSION TO PROFIT: 3 Insider Strategies to Make More Money Acting
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