This guest post is part of a two part series written by Kelly Phillips Erb, a tax attorney who blogs for b5media at taxgirl.com. You can find out more about Kelly here. For more information about tax and blogging, check out her handy list of prior articles on the subject including Problogger articles!
“Should I incorporate to save taxes?”
I get this question a lot over at taxgirl.com – and most of the time, it comes from bloggers and freelancers. It’s understandable. We hear all of the time how corporate tax rates are ridiculously low and individual taxpayers pay at higher rates – this tends to be true in most countries. And, in the US, the self-employed are also hit with a self-employed tax of about 15% on top of income tax. Add in penalties for not making estimated payments and tax time can be quite painful for the self-employed.
It would follow, then, that incorporating just to save on taxes makes sense, right?
Unfortunately, no. What often gets left out of these discussions is that the corporate tax is a tax on corporate profits – but that doesn’t replace an individual tax. Money that you take out of the corporation in the form of dividends and/or salary will be taxed on your personal income tax return. Translation? You’re likely not saving money in most cases.
That doesn’t mean that there are no advantages to incorporating as a freelancer – there are. It just means that the tax advantages, with few exceptions, tend to be rather insignificant for folks who are self-employed.
You don’t want the “tax tail to wag the dog” when making this important decision. Put the tax consequences aside for a moment and consider exactly what you hope to accomplish and what your individual needs are. What is it that you want to get out of incorporation? We’ve already established that, with respect to blogging and freelancing as an individual, incorporation may not save you tax dollars. Is there something else that you’re looking for?
Here are some quick reasons to consider incorporation:
1. Credibility
Yeah, it sounds weird but it’s true. Some corporations will take you more seriously when you’re “Crazy Dog Productions, LLC” than when you are “Kelly Phillips Erb, tax blogger.” This may not be the case for networks – like my own b5media – since networks tend to hire a writer, not a company. But it can be true when working with affiliate programs and other companies. One big ISP that I know of, for example, will not, as a policy, issue a 1099 to an individual; they only hire incorporated entities.
2. Health Insurance
Here’s a fact that many people don’t know: for most insurance companies, individual rates are more expensive than corporate rates. Additionally, corporate groups are not generally subject to individual physicals for the purpose of determining coverage. As a bona fide corporation (you will have to produce documentation), you may be entitled to receive a corporate rate so long as you have a “group” – with most insurance companies, two or more employees constitute a group. This is why writing co-ops are so popular.
3. Liability Protection
The idea of protecting personal assets from liability is an increasingly important issue for bloggers. Don’t be fooled: incorporating doesn’t mean that you can do, promore or write anything that you want and escape liability. But incorporation – again, as a bona fide corporation – can protect your personal assets from attachment from some kinds of judgments. The amount of protection afforded and the level of protection vary from state to state according to the type of entity. As a general rule, however, most corporations allow for some protection from liability so long as you follow corporate formalities.
4. Because it looks good
Oh come on, you were thinking that, right? Having your own company kind of announces to the world that you’ve arrived. It says that you’re serious, that writing is not your hobby, but your career. You are your business. And it looks good on a business card… There’s nothing wrong with that!
There are other reasons that incorporation might make sense – savings on self-employment taxes comes to mind and are referenced in part two of this series. However, some of those reasons require a level of scrutiny into your finances, your current tax situation and your plans for the future that can’t be had on a blog post. I would highly encourage you to have this conversation with your legal or tax professional to get the best advice for your personal situation.
But keep things in perspective. Evaluate the reasons why you might want to incorporate your business – and make sure that you’re ready to treat it as a business. Arm yourself with the facts and consult with the right folks. While it’s easy enough to incorporate, most corporate entities fold within the first two years of business – don’t become one of those statistics.
Check back tomorrow for part two of the series to find out more about popular forms of business entities.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation. If you have a question, ask the taxgirl.
