To incorporate or not to incorporate, that is the question. And the answer, as with most things in life, is maybe. The benefits of doing business as a singer corporation can save you thousands of dollars in taxes every year. Unfortunately, there are also reams of irritating paperwork to accompany those privileges. If you are very organized and methodical, or if you can afford to hire a team to manage the icky side of business (which is defined as anything other than cashing checks), then the answer is probably yes.
It depends on three things:
How much money you make. Establishing and maintaining a corporation can cost a couple thousand dollars a year. Your income must make it worthwhile.
Whether your official residency is in the U.S. or overseas. International singers should consider the tax laws in their homelands first.
Whether you work for one employer or many. If you’re an artist in residency with one company, the IRS will consider you to be an employee of that employer. If you receive more than one W-2 or 1099 a year, then read on.
There are three ways of setting yourself up in business: a sole proprietorship, a limited liability company and a corporation. According to Sumner Fein (sumner@ccon.com), a certified public accountant who works with classical artists in the Los Angeles area, “If you’re a sole proprietorship, you add up your income and expenses and whatever’s left over, that’s what you’re taxed on”. A limited liability company is useful if you’re in a dangerous profession and need to limit your financial liability. Tax-wise, it’s pretty much the same as a sole proprietorship. If the employment contract is in the name of the LLC, then only the company’s assets can be sued in the event of a mishap. Sopranos who can hit a window-shattering high C might want to take note (pardon the pun), but most singers won’t need that kind of protection.
Incorporating yourself as a business is a complicated, but potentially rewarding, structure. According to Don Franzen (dfranzen@lawff.com), a Beverly Hills, California attorney who specializes in representing classical musicians, there are many benefits to incorporating. “To a limited extent you can defer some income into the next tax year. You can maintain, in some circumstances, a different calendar year-end for the corporation than for the individual tax return. So that gives you the opportunity to push some income off one year and defer it for taxes in the next year. You can also deduct 100% of business expenses while a sole proprietor can deduct only to the extent that the expenses exceed 2% of his adjusted gross income.” Wait, there’s more.
There are two types of corporations, S-Corps and C-Corps (please see sidebar for more detailed information). A C-Corporation allows you to set up a medical reimbursement plan and deduct medical and dental costs and insurance. Fein explains, “By way of example, let’s say a singer makes $200,000 a year. An individual [tax payer] would have to meet a threshold of 7.5% or $15,000 before they were able to write off any medical expenses. If you’re incorporated, you could write the whole thing off as a corporate expense [beginning with the first dollar].”
What about folks who work overseas? Franzen continues, “If artists perform overseas, their income is subject to taxes and withholding in those countries. If money is taken out as tax in the foreign jurisdiction, the artists can take that tax credit against taxes owed in the U.S. So you don’t lose the money. If you’re collecting all your income in a C-Corp and the C-Corp is never going to pay any tax, you’re going to lose the benefit of the foreign tax credit. So for artists who need the medical/dental deduction, they can perform under a C-Corp in the United Sates but perform outside the U.S. under their own name or as an S-Corporation. Then they can apply the tax credit against the taxes they will eventually pay as an individual.” Pretty sneaky, huh? There’s more.
You probably won’t be singing into your 90s. Retirement will loom one day and you’ll want to be able to afford first-class accommodations at the retired singer’s rest home. Don Franzen says, “Through a C-Corporation, you can set up a fairly aggressive pension plan that allows you to shelter a portion of your income—and it’s still more beneficial than the types of plans, Keogh and such, that are available to self-employed individuals.” If your kid wants to go to private school, you can also borrow up to $50,000 from your corporation’s pension plan, whereas a self-employed individual cannot borrow at all. There’s one more benefit. Corporate retirement plans are not subject to creditors or bankruptcy judgments. So you can go ahead and commit crimes with financial impunity.
So what’s a corporation going to cost you? The one-time fee to set it up runs between $500-$3,000, depending on whether you do it with a paralegal or a team of lawyers and accountants. Sumner Fein estimates that the annual accounting costs approach $2,000. “In order to get money out of a corporation, you have to take it out in the form of a payroll, so you set up periodic payroll [with your accountant]. At the end of the year, you want to make sure that your C-Corporation zeros out, so in December you get together with your accountant again to make sure it comes out to zero.” Other annual costs include a separate tax return for the corporation and the individual.
To keep a corporation above reproach, you need to have an annual meeting and keep corporate minutes. This is a formality that usually only takes place on paper, but it does need to be done. Fein warns, “Many corporations don’t do this, but if you’re audited by the IRS, then you go back and you do it retroactively, [you may lose your protection as a corporation].” If your attorney takes care of this, it will usually run about $250-$500. In addition, there are payroll taxes of around $300 a year.
So, should you incorporate or not? Don Franzen offers his rule of thumb. “Given that there is an expense in starting and maintaining [a corporation], we recommend that you have a certain threshold of earnings before it really makes sense to do this. I’d say it is at least $100,000 a year. Otherwise it’s probably not going to be cost-efficient.” It is also vitally important to discuss your situation with an accountant or attorney. They will be able to help you with the most recent and detailed tax law information. It is worth it to pay them a couple hundred bucks now, and get the professional advice you need, in order to save thousands later.
Still can’t decide which business structure is best for you? Franzen has one more tidbit. “Generally, the type of business expenses that performing artists have present better on a corporate return than on an individual return.” Bottom line—a personal return loaded with business expenses is audit bait.
