By Evan Pillsbury on Jul 29, 2020 1:11:21 PM
With social media and streaming platforms becoming a huge part of the world we live in, many people have created their own channels to not only entertain but also make money. Those that do choose to embark on the journey of becoming a professional streamer or influencer should be aware of how to personally limit themselves to lawsuits and how they will be taxed on the income they receive. In this blog, we will identity different business entities that streamers/influencers can utilize at the beginning of their journey and as their channel grows.
Sole Proprietorship For Beginning Streamers/Influencers
The first business entity that we will discuss is the sole proprietorship. This type of business entity is one that does not generally require any setup. There are no required filings to start this type of business entity and most streamers/influencers probably operate as a sole proprietorship without even realizing it. You can also choose to either operate the business under your name or you can register a name your business will operate under, also known as a DBA. This may be something to think about if your channel has a specific name or theme to it.
A general question that comes up for people starting a business is whether or not an Employer Identification Number (EIN) is necessary. The answer is that an EIN is typically only required when the sole proprietorship will have employees. Most streamers/influencers who are in the early stages of growing their business probably do not have employees and so it probably isn't necessary. However, when you setup your business bank account, the bank may require an EIN.
A sole proprietorship does not offer personal protection should someone bring legal action against your business. For example, if someone were to sue you for something you did, said, or posted on your channel, they would be coming after not only your business assets but any assets you may personally own such as a home or bank account. The big consideration is how vulnerable do you believe you are to a lawsuit. At the early stages of growing your channel you are probably less vulnerable but, the need for some protection is something to keep in mind as the channel grows (particularly if you already own a home). One way to give yourself protection while operating as a sole proprietorship is to purchase proper insurance.
How You Are Taxed
A sole proprietorship is a pass-through entity. This means that any income the business makes will pass through to you personally and be reported on your tax return, regardless of whether this money is moved from your business account to your personal account (remember you should have a separate business bank account).
A benefit to having the income pass through to you personally is there are less filing requirements like there would be with a Partnership or Corporation. To report the income and expenses from your business you simply include this information on a Schedule C with your personal tax return.
Side Note: Keeping track of your business income and expenses throughout the year should be a priority. By doing this you can make sure that your business is trending in the right direction for profitability and you're protecting yourself from being audited in the future (and/or surviving an audit). For more information on important considerations for starting a business see our blog, 7 Fundamental Components for Starting Your Small Business.
A drawback to running your business as a sole proprietorship is that the income you make from your business will be subject to both income tax and self-employment tax or SECA and is used for Social Security and Medicare. Now, self-employment tax isn't an additional tax that is there to punish taxpayers who are self employed. It simply replaces the FICA tax that is paid by W-2 employees and their employers. In other words, just because you are self employed does not exclude you from paying into Social security and Medicare. The drawback is that the amount you will pay is 15.3% of your self employment income to self employment tax due to having to pay both the employer's share and the employee's share of the tax. For more information on the breakdown of payroll taxes these percentages see our blog, Payroll Taxes and The Employer/Employee Responsibility.
Limited Liability Company (LLC)
The second business entity that we will discuss is the Limited Liability Company or what is more commonly referred to as the LLC. This type of business entity may be more suited for a streamer or influencer who has grown their channel and is starting to see some income being generated along with potential sponsorship opportunities.
Creating The LLC
The basic steps to creating an LLC can differ from state to state. In the State of California you will need to do the
- Choose how your business will be taxed (more on this later)
- Register your LLC with the Secretary of State
- File a Statement of Information
- Apply for an EIN
- Create an Operating Agreement
Setting up an LLC does require more steps than a sole proprietorship and most states have their own rules and regulations regarding how to create and operate an LLC. By default, an LLC is not recognized for tax purposes but more for protection purposes. By creating an LLC you will now be separating your business from you personal in regards to legal liabilities. This means if someone were to sue your business, you and your personal assets would not be on the hook. However, if the LLC is not managed properly you could lose this protection.
LLCs can be a bit tricky to understand when it comes to taxation. When you register your LLC you will also need to notify the IRS of how you would like the LLC to be taxed if you will not be using the default election. This means that a person who is the sole owner of the business could elect to still be taxed as a sole proprietorship. In fact, if no election is made and you are the sole owner of the business you will be taxed as a sole proprietorship by default. You can also be taxed as a partnership by default if there is more than one owner and no taxation election is made. Being taxed as a partnership may not make sense for most streamers or influencers given the fact that there probably isn't more than one owner (at least when the business is first started). Finally, you can elect to have the LLC taxed as a corporation. There are two types of corporations to consider, S-Corp and C-Corp.
Side note: There is a minimum fee of $800 for having an active LLC in California.
Forming a corporation for your business probably is not something you would do right from the start. This type of entity is usually reserved for once the business is established and has seen serious growth where the net income for the business is exceeding $100,000 or more. There are also two different types of corporations that can be formed, the S-Corp and the C-Corp. S-Corps do have certain guidelines that must be followed in order for the corporation to maintain its S-election. For more information regarding S-Corp requirements see our blog, Eligibility Requirements of An S-Corp.
Maintaining a corporation requires much more attention due to the filing requirements and general upkeep of the business. In this section we will focus on S-Corps due to the fact that C-Corps, in most cases, won't be something a streamer or influencer would utilize.
Creating An S-Corp
An S-Corp is able to be created either by forming a corporation and then making the election to be taxed under subchapter S or by creating an LLC and making the same election. The biggest part of understanding an S-Corp is that as an owner you will be both a shareholder and an employee of the S-Corp. What this means is that you will be paying yourself reasonable compensation (a salary) as an employee for the work you do for the S-Corp. This requires you to maintain payroll for the wages paid to yourself or you can hire a payroll provider to take care of this for you. If you grow your business to the point where you are hiring additional employees, you will also be responsible for maintaining payroll for them as well.
Like the LLC, the S-Corp offers protection for you personally should there be legal action taken against the business. However, if the S-Corp is not kept up-to-date or payroll is mismanaged it is possible for the corporate veil to be pierced, meaning you could become personally liable. Another benefit that comes with having an S-Corp is the minimized risk of audits. Statistically an S-Corp tax return is audited less than personal/sole proprietor returns. This does not mean you should fall behind on your recordkeeping duties...but it is a notable advantage.
An S-Corp is a pass-through entity. This means you will not pay any income taxes at the corporate level like you would with a C-Corp. However, because you will be both an employee and a shareholder there are a few pieces of information you will need to be aware of. Like we have already discussed, you as the employee will be paid reasonable compensation through payroll. This will require the S-Corp to not only withhold taxes from the amount for you as the employee but the S-Corp will also have to pay over the employer's portion of the payroll taxes as well (these of course are deductible for the S-Corp). See the blog above for a refresher on the employer/employee responsibilities for payroll taxes.
The real benefit to having an S-Corp comes on the shareholder side. Once you have paid yourself through payroll and met your reasonable compensation requirement, the additional money left over is then distributed to you as the shareholder. The best part is this money is not subject to payroll taxes (social security and medicare) though it is still subject to income tax.
S-Corp grosses $200,000 of income. After the S-Corp pays $50,000 for the expenses necessary to run the S-Corp and $80,000 worth of salary for you as the employee, $70,000 remains. This $70,000 will then be reported as a distribution to you the shareholder. But, this $70,000 is not subject to payroll tax.
Now, just because it is reported as a distribution on your personal tax return doesn't mean you have to transfer all this money from your business account to your personal account. The business will of course need money to continue to operate.
For more information on S-Corps see our blog, What You Really Need To Know About S-Corp Tax Savings.
There are a few items that need to be pointed out in regards to maintaining an S-Corp. Because it is required to pay yourself reasonable compensation, if you are actively participating in the business, there will be quarterly payroll returns that need to be filed. However, if you hire a payroll company to handle this, there will be less to worry about. You will also need to file a separate return for the S-Corp at the end of the year called an 1120-S. Finally, you will need to file an annual statement of information with the Secretary of State each year to make sure you are updating the state of any changes within the S-Corp. Finally, like the LLC there is an annual fee for operating an S-Corp in California, which is the greater of $800 or 1.5% of net income.
Where you are in your journey to becoming a professional streamer or content creator will determine what type of business entity you should be operating under. At the beginning, a sole proprietorship will most likely be the best entity due to the minimal requirements needed to start one. An LLC may be your next step as your business grows. The LLC will offer more personal protection but still allows you to be taxed as a sole proprietorship. As the business grows even more you can form an S-Corp that will offer you tax savings and even more stability. If you formed an LLC prior to this you can also simply make the election for the LLC to be taxed as an S-Corp.
When determining the best entity for your business it is always advisable to speak with an attorney experienced in both entity formation and taxation. This will ensure that everything is being properly setup and allow you to focus on what you do best, streaming and content creation.