You Down With LLC? Yeah, You Know Me!
Guest Feature: Ryan Shaw
I’m a gig worker. Is an LLC for me?
As a gig worker, there are two ways you can be paid for the work you do:
Paid directly as an individual
Set up a company to transact business through.
The above choices will receive a 1099 which is different as most people think of the traditional employee who receives a W2. A W2 employee has an employer (or the employer of record, such as CAPS) that pays you, taking out all relevant taxes on the state and local level, and you receive a W2 at the end of the year.
The option of being paid directly and receiving more money up front can be very appealing, and many people believe if you form a company, you can save on taxes. However, the biggest benefit to forming a company as a gig worker isn’t to save money on taxes, but rather to protect your personal assets in the case you find yourself in any legal issues. But the tax benefits can be nice, too!
We Zoomed with Ryan Shaw from PS Business Management (Thanks to Todd @ CAPS for the intro!) and he walked us through some of the things you need to know when thinking about forming an LLC, and items to keep in mind when filing your taxes.
An LLC is not meant for everyone.
Ryan suggests that you consider the net annual income (after expenses) you bring in as a gig worker before forging ahead with an LLC. If you are netting less than $25,000 a year, you are most likely better off paying the self-employment taxes incurred as a gig worker or having your employer pay them as a W2-employee, if that’s an option.
If you get paid directly and get a 1099 at the end of the year, this income is taxed at the rate corresponding to your tax bracket. On top of that, you are also responsible for self-employment tax which ends up being approximately 10-12%. However, if you are incorporated, there are ways to avoid that tax.
There are multiple ways to form a company, and different tax classifications for each. Some examples include corporations and LLCs -- LLCs being the most common among gig workers. An LLC, or Limited Liability Company, can be formed as an S-Corp (one person) or a partnership (multiple people). Ryan recommends talking with a tax professional or business manager to determine which is right for you.
Let’s dive deeper into self-employment taxes. As an example, if you set up your LLC as an S-Corp and you had a $100,000 net profit at the end of 2020, you could save approximately $10,000 in taxes (10%). In order to do that, you have to pay yourself a “reasonable salary” which is an amount determined by you. Since that salary is considered payroll, as the employer, you will have to pay the appropriate payroll taxes as well as social security and medicare taxes. Ryan suggests a salary of approximately 25% of your net profit, being careful that it’s not too low that you raise a red flag to an auditor. After you pay yourself $25,000 and the required payroll taxes, then your net profit drops to $75,000 and you avoid self-employment taxes on that balance.
There are several fees associated with an LLC, including startup and annual fees, which vary depending on the state of incorporation. California is $70 to incorporate, but has a minimum of $800 annual fee. New Jersey’s start up fee is higher at $125, but the annual fee is a much lower $75. Professional guidance is highly recommended here. Many people use third party services such as Eminutes or Legal Zoom to help set up an entity. While there are additional costs in having a third party processing the paperwork, you can save yourself from headaches down the road should you file incorrectly.
Now, let’s talk about insurance for your LLC. Once you’ve formed your company, you should have worker’s compensation insurance to protect yourself if you get hurt while working. This could potentially be omitted for some LLCs, but those in the live event business will likely benefit from this coverage due to the nature of risk in the industry. If you are not an employee of the event you are working and you get hurt, you are not covered under their policy. That creates great risk. Ryan also suggests general liability coverage.
Finally, if you are classified by the IRS as a gig worker, either as an employee or with an LLC, you should remember to deduct any work-related expenses from your net earnings. Examples of such expenses include travel (including gas) and meals not paid by the gig, and supplies required to do your job. Check out our Headliner article on gig worker taxes for more on deductions. This part is key as these deductions help reduce your taxable income.
Ryan Shaw is a Business Manager with PS Business Management. With over 15 years of experience in the music industry, Ryan first honed his skills at a public accounting firm.
While getting a taste of the entertainment industry from the beginning of his career, he also was trained in taxation and audit fields of accounting, earning his CPA. This foundation has helped set him apart from other business managers. Having a tax background and still a practicing CPA, benefits his clients as he can help make decisions in real time knowing the year end financial effects.
The relationships built with clients and their teams is the most important aspect of his job. Every artist is different, so finding a connection is always vital.
Outside of the office, Ryan loves spending time with his two young children and strapping on his skis to look for some freshies.