Dear Lacey, at what point is it beneficial for a performer to incorporate and are there any good reasons NOT to incorporate?
Generally speaking, if you receive any form of non-employee 1099 income (meaning not an official paycheck) then it’s advisable to incorporate. There are numerous benefits including limiting personal liability in the event of a lawsuit by shielding your personal assets. Another key benefit, especially for porn performers, is the ability to protect your personal social security number from unknown producers or various companies.
Understandably, most Individuals choose not to incorporate because they either don’t want to be bothered with the paperwork or they think it would be too difficult and expensive to set-up and manage a company. The key here is to choose the most efficient business structure to fit your needs. Honestly, it’s not nearly as complicated as you may think. A single-member LLC (Limited Liability Company) is generally a good first choice to consider for your basic porn performer, stripper, escort or even Cam-Girl. It’s quick, easy and inexpensive. Another good option would be an S-Corporation, but this is geared more towards very high earners or even production companies.
Let’s quickly start with the basics:
The classification of a 1099 Independent Contractor, D/B/A (Doing Business As) or a Sole-Proprietor are considered the same. This would generally include anyone who doesn’t have an official IRS Tax ID# and therefore gets paid through Form 1099 at the end of the year under their personal social security number. The “worker” and “the business” are considered the same entity with no separation.
Other than the initial set-up paperwork and associated fees, which we’ll discuss later, there really aren’t any major disadvantages to incorporating. I guess if you’re a cam-girl making like $10K for the entire year then you could probably skip it. But, most porn performers and strippers would definitely benefit from the asset protection since they work closely with the public where there are potential lawsuits possible.
There are a wide variety of business structures. For the purpose of this article I’m going to quickly throw almost all of them out. Most just don’t apply within the scope of this article. So, here we go:
C-Corporation (C-Corp.) – We’re talking the issuance of stocks & bonds, shareholder meetings with recorded minutes, corporate tax returns, a board of directors and this little thing known as double taxation which means the profits are taxed at the corporate level and then again at the individual level. Yes, the same exact money is taxed twice. The legal protections and tax shelters are huge, but they do come with a price. Obviously, they’re also the most difficult to set-up and maintain. For the scope of this article, a C-Corporation isn’t even an option worth considering.
Partnerships or Multiple Member LLC’s – Both serve a vital purpose, but not in this discussion. Personally, I’m just not the biggest fan of either structure.
From an accounting standpoint, if a group of two or more individuals want to open up a business together then it would generally be advisable to just go with an S-Corporation for the added liability protection and larger tax benefits. (See S-Corp. below).
S-Corporation (S-Corp.) – This business structure consists of opening a regular C-Corporation (see C-Corp. above) and then filing for “Sub-Chapter S” classification with the IRS. There are numerous benefits from a tax standpoint, especially avoiding double taxation on profits. Filing for Sub-Chapter S classification also eliminates many of the more complicated legal requirements of a C-Corp. while offering large tax advantages.
For small to medium business with employees, higher earnings or a need for a high level of liability protection then I would highly recommend an S-Corporation. I’m a huge fan. The start-up and ongoing costs associated can be substantial. You would probably need an on going regular tax advisor, CPA or Accountant to handle the various accounting requirements. But, it’s substantially easier to operate than a regular C-Corporation and provides more tax benefits.
Single Member LLC (Limited Liability Company) –
*RECOMMENDED*
The easiest and most cost-effective business structure for many adult performers, sex workers, strippers or even cam-girls would be a single-member LLC. It’s extremely cheap and pretty easy to set-up. Your income and business expenses are reported on Schedule C of your tax return exactly the same way as any Form 1099 income is required to be reported. There are no separate tax returns to file and it offers minimal maintenance.
There are a few simple steps in setting it up, but it’s pretty easy overall and shouldn’t be that expensive whether you set it up yourself or hire someone to do so.
This brings us to sites like LegalZoom(dot)com or other “quick & easy” websites where you answer a simple questionnaire and then pay the required fees. All required forms are then prepared and filed for you (except any local forms that may be required.) It’s unbelievably easy and inexpensive. In CA, you’re looking at somewhere around $250 and you’re done. The $250 includes the website attorney fees to prepare everything and all required state fees due.
Obviously, you can also call a local attorney or tax accountant for pricing as well. If it’s between a site like LegalZoom(dot)com and a local attorney/tax accountant for the same price, I would go with the local professional. Just my opinion.
I have to admit my main problem with these “quick & easy” business start-up websites are the absurd amount of extra services they try to get you to buy.
For example, LegalZoom(dot)com charges like an $80 fee to obtain a new Tax ID# from the IRS. For future reference, getting a new Tax ID# from the IRS not only takes all of 5 minutes, but it’s 100% FREE. Yes, FREE.
The on going accounting aspects of running an LLC aren’t all that different from being an individual 1099 Independent Contractor. The major difference is that you’re required to have a completely separate business checking account. There is no co-mingling of funds here. Your personal money and all money associated with your business will now be completely separate: (you should really do this whether you incorporate or not):
-ALL income checks will be deposited into your business checking account.
-ALL business expenses will be paid directly from your business checking account.
(Remember to ALWAYS keep business expenses separate from personal expenses in the event of an IRS audit. It also keeps overall record-keeping so much easier. The IRS gets *seriously* pissed when business and personal expenses are combined or paid out of the same bank account.)
-In order to “pay yourself” or “take money out of your business” for your personal use requires you to simply transfer money from your business account to your personal account. In an LLC, this is known as a DRAW. No payroll taxes are taken out.
-Your payroll taxes, which are normally taken out of a standard paycheck, will now be paid when making your quarterly estimated tax payments to the IRS.
(In most cases, if you receive any type of 1099 income you are required to make these quarterly estimated tax payments. There are rules and limits that apply. It would require a whole separate article to explain the intricacies of estimated tax payments, so we’ll just leave it alone for now. This article is long enough already. Sorry.)
Hopefully, this gives you at least a starting point for your own research. Good Luck.
*Make sure to keep sending your questions to me or Mike. We’ve received some really good ones so far*
Whatever you do, don’t ever let anyone charge you for a new Tax ID# from the IRS. It’s FUCKING FREE!!!! 🙂
~Lacey
FOLLOW LACEY ON TWITTER – @Lacey4653
22 Responses
Ask Lacey: Should I Incorporate my Business? http://t.co/wS0OaS86ZN
“Ask Lacey: Should I Incorporate my Business?”
By: Lacey Blake
http://t.co/vH2EojokpH
Lacey,
I do agree with your analysis. There is something that I thought you should add. If you do use an inc or an llc, there is the $800 yearly fee to the State. In addition, you will have to employ an accountant to do tax returns for the entity (perhaps $1,000). So, while it may be well worth it given what can be written off, there are other expenses, particularly these two, that need to be factored in.
@JimF –
When I started writing this I thought about catering it towards CA, but there are plenty of people who visit this website that aren’t in CA so I tried to stay as neutral as possible.
I’m in New Orleans. The yearly LA state fee here is $25.
$800 seems ridiculously high, but I would expect nothing less from CA.
I’ll make a note of that within the article for those in CA.
If someone is trying to charge $1,000 to prepare taxes for a basic LLC with a basic 1040 and a Schedule C, then fire them. The tax preparation for basic 1099 income vs. a single-member LLC is exactly the same. It shouldn’t be that expensive.
An S-Corp. Would be handled completely different, but we’re talking high earners who should be perfectly capable of paying for a monthly/quarterly accountant along with the increased tax preparation fees.
If anyone has state-specific fees, let me know and I’ll update the article for future reference.
Thanks! 🙂
Excellent article. I do have to stress whether a performer is an LLC or not that he/she needs to keep complete records of all expenses regarding his/her porn employment. Close to anything required to do business is deductible including that expensive testing you have to get every 12-14 days. If you are an LLC than even mileage is deductible (a trick for maximizing deductions for mileage if you are not a corporation is to open a PO Box close to home and check it on the way to work — the mileage from home to the PO Box is not deductible but having that stop makes the mileage from the Post Office to the worksite deductible — the mileage from home to your first stop is generally not deductible as an individual although it is as a corporation).
@titsandsass Thought this might be of interest: http://t.co/vDaCFAj3qV
Jay Mckenney liked this on Facebook.
@mharris –
That’s a pretty clever little trick. lol. Although, all mileage under an LLC is tax-deductible.
While an LLC (Limited Liability Company) isn’t technically a full-fledged “Corporation,” it’s still a business entity that accomplishes the same tasks of legally & financially separating the “individual” from the “business.”
Home offices, auto depreciation, mileage, self-employed health insurance, testing, etc. are ALL deductible.
RT @MikeSouth1226: Ask Lacey: Should I Incorporate my Business?
By: Lacey Blake
http://t.co/wS0OaS86ZN
I should have been more clear I guess. The mileage trick is applicable if a person does not create an LLC or S-Corporation. I said that with the assumption that some will not create an LLC even with advice. I don’t have a whole lot of experience with LLCs but thought that the corporate veil (separating business liability from personal), corporate deductibility rules and the like applied. I have experience with sole proprietorships, partnerships, individuals and some S-Corporation tax but don’t recall running into or using an LLC (although my father and I had a business at one time that could under today’s rules be under an LLC easily).
Oh, now I get where you were going!
I, personally, own 2 LLC’s and an S-Corp. I have a ton of experience with LLC’s.
You are correct that the corporate veil and deductibility rules do apply…
It gets a little trickier with the mileage when someone is an employee and also doing IC work throughout the day… that’s always fun!!! hahaha…
I get that last one, Lacey. Theoretically the IC work would be deductible and the drive to a W2 employer driving not deductible but if someone drives from their house to an IC job and from the IC location to a W2 employer (or better yet from home to IC #1, then to W2 employer than to IC #2, I am not even getting into the amount of mileage issue here fully but if say you live three miles from the W2 employer but you go to IC #1 before going to the W2 employer and the IC #1 is 80 miles from your home (and 77 or 83 miles from the W2 employer) that can be a tricky issue the way the law is written) sometimes you just have to take a best (hopefully educated) guess as to what will stand up during an audit. For the record this comment discussion is certainly BBA level and probably close to MBA level issues (I think Lacey has an MBA in Accounting, that is the standard for a CPA in Michigan anyway for anyone testing after approximately 2000) so I apologize to the general public if you don’t understand the past two comments.
Lacey: This is really well done. Two things any independent contractor should be aware of – regardless of their incorporation status – is this:
Incorporating does give you some liability protection. This may vary by state, but as a rule, if someone sues you they will sue both your LLC and sue you personally. Again, it may vary by state but …. I live in New Hampshire. I’ve been sued a couple of times in my professional capacity – which is media related although not porn – in federal court. Plaintiffs in Washington, D.C., Virginia and Pennsylvania. In all of the suits, the actions were filed against the media organization that contracted with me to do the work, all of the editors who worked on the projects were sued personally, and I was sued corporately and personally. In all three instances, the courts allowed them to go forward. We won all three suits, so whether a judgment would’ve been entered against me personally or corporately is hard to say, but the courts did allow the plaintiffs to sue me personally even though I was incorporated.
Lacey makes a great point about quarterly payments. It’s important for self-employed folks – whether they are incorporated or not – to remember that regardless of deductions, they are responsible for the full 15.3% self-employment tax that covers social security and medicare, up to the first $117,000 and then 2.9% on your net income in excess of $117,000. This can be a shock to individuals who have always drawn a paycheck where their employer paid half of the social security and medicare contribution. So …… a safe bet is to put aside about 33% of your check to cover the self-employment tax and your income tax responsibility.
Last ….. if you’re self-employed – again regardless of your incorporation status – you should investigate SEP and SIMPLE IRA’s for retirement contributions. These are 401K’s for the self-employed.
wow ! this all sounds very good.
Lacey, I am about to get my anus and
pussy(vagina) tightened up for more possibilities
of getting more work in adult. Can that also be deducted
for taxes? I also spend a lot of money on Feminine odor products
and can I also deduct for that too?
How about for having a attorney on retainer for possible
prostitution arrest matters if I am busted for escorting in
New York through one of the escorting agencies I work for?
Can I deduct for that?
@Yurizan –
At least you’re a funny little troll…
I’m a HUGE fan of sarcasm. Keep up the good work. 😉
I can’t wait for Lacey’s response to this one. I also didn’t even know that you could have a pussy and ass tightened so this one is new to me (I am male, not a porn performer, don’t have a pussy and my ass is for pooping only so I won’t be availing myself of that procedure). I would have to say (I also have an accounting degree) if you can prove that the procedures were instrumental in getting you more work that you would have a decent case for deducting the expense. The problem is proving to an IRS auditor that the procedures actually allowed you to get more work and that it wasn’t just a personal choice.
You have a better case regarding the “feminine odor products” as a person will not work with someone with a fishy smelling pussy. However, I encourage you to get to your doctor to get this treated as you probably have bacterial vaginosis which can be treated with medication quite quickly (and the medication would be deductible in this instance as well). A woman should rarely need “feminine odor products”, adult industry or not. For the record this is so common that Vivid actually keeps douches (and Fleet enemas which are also deductible if you have to purchase them — I can see a need for those if a woman is doing anal) on set for their performers so please help Nina Hartley (who I got the info from via an AIM video) spread the word about bacterial vaginosis.
It is a no-go on the attorney retainer fees for escorting as the practice is illegal in all 50 states (Nevada allows for prostitution houses in some areas of the state but not escorting). However, if you do
“legitimate” adult industry film production as well an attorney retainer for that would certainly be deductible. Nothing to do with tax but I also suggest not taking clients in NYC — Rikers jail (actually an island with nine jails on it IIRC) is a house of horrors and if you get arrested for prostitution that is where you would be held. Los Angeles women’s jail is also very dicey regarding women’s comfort and safety. Good luck whatever you end up doing.
EDIT: I see Lacey’s response. Whether I responded to a troll or not the issues are real so my answer stands.
@Lacey
Thanks for this great summary!
We went the extra mile to do an S-corp after initially deciding an LLC would suffice until we met with attorney who explained the legal, tax and insurance details specific to our situation that would be best offset with the s-corp.
That reality aside from the “sounds like a great idea” add-on products pushed at consumers of DIY legal sites made us very glad to have pursued appropriate advice so we didn’t waste money and time on a corporate structure that may have cost us much more down the road than the savings we hoped for or anticipated by going with a simple LLC.
BT raised the second (after taxes) big issue we struggled with …personal liability concerns. Our primary issue was protecting personal assets and our home until lawyer and insurance agent explained the insurance benefits related to each corporate structure. We ended up with some type of umbrella policy with a ridiculously high coverage that includes the same legal defense coverage if personally named as well being named as a corporate officer/employee. This was paramount to us at the time as a friend who won a suit against them personally and professionally was stuck with the personal defense tab despite winning a judgement for legal expenses from the deadbeat who thought they might be a good meal ticket.
Good move on your part, Lurking. Attorney’s fees for a defense cost a bundle especially if it goes to trial. Just because there is a corporate veil doesn’t mean some asshole won’t attempt to go after personal assets as well, a corporate owner will avoid personal liability 95% of the time (the other 5% is gross negligence by the owner or an owner’s agent generally) but the cost of attorney’s fees and court costs to use that corporate veil can be great ($100K+ in a worst-case scenario). Certain businesses almost require a corporate structure to insulate a person’s personal assets (a bar or other place of entertainment comes to mind) because of the risk of lawsuit (drunk driving accident where the drunk driver last drank a half hour before the accident at your bar as an example).
Also good move hiring an attorney with knowledge of tax and insurance implications. Usually you end up with an attorney, CPA or other accountant and insurance agent all chiming in as to what they think you need leaving you to figure out who has your best interests at heart.
LurkingReader – thanks for bringing up a personal liability umbrella policy. I forgot to mention that for a simple reason – I never had one during the 30 years I was a freelancer (last summer, I took a job with a publishing company for the first time since 1983). My business lawyer said that from a liability standpoint, anyone who was going to sue me corporately would also sue me personally since I am my only employee and that was legal in New Hampshire. So ……. our insurance agent suggested I take out a personal liability insurance policy to protect my personal assets.
The premiums were so ridiculously high that I decided to pass. As it turned out, each of the three lawsuits I was involved in, including one that went all the way to trial, also involved the publisher who retained me and the publisher provided my defense and covered all of my expenses related to the suits, including living out of a hotel in Harrisburg, Pennsylvania for six weeks during the one case that went to trial.
For a porn production company, especially a small producer, or a director, I would think that a personal liability policy in addition to business liability would be essential because of what we’re talking about – a disgruntled performer argues that he or she contracted an STD on your set; was injured because of something that you asked them to do something that wasn’t safe; that their lives were ruined by porn – who knows. If you’re a production company or a director who has a commercial business policy, you might also check to see if it includes personal liability. In addition to my freelancing career, I have also been a partner for 30 years in a retail business. Our business insurance policy includes $1 million in personal liability. Similarly, I own some rental properties and have landlord insurance, which includes personal liability. Neither of those policies would have protected me in my media business but for my other activities it was there. And, if you qualify for a commercial policy, its a cheap way to get personal liability.
I would doubt a performer could get a commercial policy, but a producer or a director who also runs a set could.
I just think its important for people incorporating to understand that they are personally off the hook, especially if they are the business and pay out all of the business profits to themselves. If you’re sued, you’re going to be sued personally. You need to protect yourself to the extent you can.
@BT
The difference between ala carte coverage and the umbrella was almost as ridiculous as the amount of coverage we ended up with…until hubby called his dad who sold insurance for 40 years and got told…up it if you can, this isn’t a place to skimp.
Our friend wound up losing nearly half a mill by the time all was said and done. Lacey can explain why he has to wait to declare the legal expenses as a bad debt to write them off. Despite knowing he was throwing good money after bad it cost him nearly 20k (with travel and local counsel costs) for the judgement against the pro-se litigator. (Once the appeal affirmed lower court the plaintiff, now defendant attorney advised but didn’t represent for the separate suit suing for fees) his policy was exhausted within the first year of the three year battle that included defending his win at the appellate level where it was affirmed.
Too many people think lawyer charges expenses plus $ per hour but don’t stop to consider that this is just one expense of a protracted lawsuit. He had fees for CPA, experts and witnesses on top of travel, lodging and meals for them and lawyer needed to hire local counsel and bring assistance.
Before they even got the point of depositions he had to hire someone to keep things afloat during his many absences.
Btw…he learned real quick that the IC contract he had what he considered a very smart lawyer draw up didn’t do squat to protect him from this suit. He appealed judges ruling against the arbitration and secondly that even if arbitration were called for the scope of litigation didn’t fall within the bounds of the contracted duties.
Be very careful who you sleep with, more careful who you discuss (or brag about) business matters with and even more careful who you give gifts to. The half mill doesn’t include the expenses of keeping his wife at his side to defend this suit or the cost of the crow he’ll be eating for many years to come 🙂
@Lacey
Mileage and co-mingling were two large issues hubby and I struggled with…me trying to convey CPA advice…he had to use that Dome mileage book for every leg of the trip and either use his corporate card (preferred) or cash for EVERY business purchase. The biggest was…save the receipt!
He used to drive me crazy using personal card/cash and pitching receipts for business meals & entertainment. It has taken years but now he’s totally on board to the point where he sends new shirts for embroidered logo so he can write off cleaning and learned the value of using his calendar to record attendees and a brief mention of what was discussed.
The trick was having him meet with CPA who explained that the receipts he was pitching could have paid for our last vacation with proof. 🙂
There is nothing that can protect you from being sued – this is America and anyone can sue anyone over anything. Getting things tossed is expensive.
And, despite incorporation, people will sue you personally, especially if you are the corporation, which would be the case of a porn performer or an independent director or producer. There are some states where corporations get extra protections, such as Delaware and South Dakota. As far as I know, not a lot of porn is produced in those states.