Independence - To Incorporate or Not to Incorporate?

(Author: Vicki M. Taylor Published on: July 4, 2001)

When I made the choice to go out on my own as a technical writer I immediately set myself up as an S-Corporation. I'm incorporated as Taylor'd Consulting, Inc.

I did this for two reasons. One, because the taxes I pay on the money I earn for the company is less than the taxes I would pay if I claimed it as personal income.

Two, because if [knock on wood] I created a user manual or other kind of documentation for a company and that company was sued for their product, I couldn't be "personally" included in that suit. As an S-corporation, my personal assets are separate from my company's assets.

Types of Corporations
In the United States, there are three ways a writer can set themselves up as a corporation that will be approved for the IRS. Schedule C (Sole Proprietor), Partnership, or as a Corporation (either S corp or C corp)

Schedule C or Sole Proprietor income is weaved into your personal return and is probably most commonly used by writers or other small businesses. On the downside, if your "corporation" is sued for any reason, your personal assets are attached to the corporation.

Partnership means just that. You and another person set up a corporation as partners. This probably works best if you are part of a writing group or team.

Follow the Numbers
File for a Federal ID number and use it. This number is also called an EIN - Employer Identification Number. As soon as you file your articles of incorporation, open a business account. All of the income you earn as a writer should be deposited into a corporate bank account under your company's federal ID number.

Do not mix your company income with your personal income. Pinch your pennies somewhere else. Bite the bullet and pay the service fees for a business account. If you don't you won't be able to track your money properly and, most of all, you'll give the IRS a great reason to audit you.

All the income I earn as a writer, whether it's from fiction or non-fiction goes into my corporate account. I keep my Federal ID number (the EIN) and use that instead of my social security number on contracts. This lets me maintain my lower tax status.

It would be so easy to just lump all the money into one account because you're going to spend it anyway. Don't be tempted. You have to follow proper accounting procedures and show the money coming in as income to the company and going out as payroll to you.

Pay Yourself a Salary
Even if you are the only employee and you wear all the hats, you still have to pay yourself a salary. If you want to save yourself the headaches of tracking payroll taxes, unemployment insurance, and whatnot, get yourself a good CPA. Otherwise, check out the Social Security Administration's Employer's Kit at http://www.ssa.gov/employers/ for some great tax tips.

More Small Business Related Links
Small Office at http://www.smalloffice.com/
Small Business Administration at http://www.sba.gov/
Office of Women's Business Ownership at http://www.sbaonline.sba.gov/womeninbusi...
The IRS Small Business Corner at http://www.irs.ustreas.gov/prod/bus_info...
US Business Taxes for Small For-Profit Businesses at http://www.managementhelp.net/tax/fp_tax...
The Advantages of Being an Independent Contractor at http://www.moneyhaven.net/entrepreneurs/...

Don't Try This Alone
I very strongly suggest that anyone who wants to set themselves up as a business entity get the help of a qualified CPA. I have had one since day one and he's been a God-send. He does both our personal taxes and my business taxes. Especially this year, he was able to save us thousands. Anything that I do in the course of my writing, whether it be research, supplies, membership fees, etc can be partially written off as an expense. With a corporation, 15% of any expense is automatically deductible.

In order to keep yourself out of hot water, maintain meticulous records. Keep receipts for everything AND Document EVERYTHING. Some writers suggest that you keep a writer's diary of your activities. I don't go that far because I keep every letter, e-mail, and response.

Don't forget that you are going to be looking for contracts. Keep records of time spent online at job links, contacting leads, and sending out proposals.

Best Advice?
KEEP EVERYTHING!!! That's the best advice I can give you. Keep all correspondence with editors. That includes every time you submit a resume for a contract and every time you get a response.

The Chicken or the Egg
Writers find themselves in a catch-22 situation. Getting incorporated before or after your first contract. Which should you do first? If you can afford it, get incorporated first. It'll save you a lot of hassle and paperwork later. What about freelance writing? Do you have to sell an article before you can incorporate? Nope.

Big Brother is Watching
Yes. The IRS is going to be watching you. How do you prove to the IRS that as a "writer" you are working? That's where all your meticulous record keeping comes in. To prove to the IRS that you aren't just some bum sitting at home scribbling in notebooks or pecking away at your computer you show your attempts to get contracts. The searches, the proposals, the correspondence. And, if you are writing articles as well, you show them your drafts, your finished products and your query letters. Oh, and your rejection letters too. Keep it all.

This is what is called, "value-added" work. Include your membership fees, your expenses to conferences, your subscriptions to publications, even the weekly newspaper that you read for the classifieds. All of this proves to the IRS that you are acting like a writer and are attempting to get contracts. It shows the IRS that you are trying to make a living and are attempting to become profitable.

I think that for a sole proprietor, you have to show a minimum of 500 hours a year. Which, if you break it down, comes out to something like 10 hours a week. So, make sure you keep records to show you've spent at least that much time at your writing.

There is something called the three out of five rule. It means that the IRS would like you to show a profit in three of your five years in business. Now, event the IRS knows that it can take years to become published. So, not showing a profit for three or even five years isn't uncommon as long as you keep good records.

I've been incorporated since 1998. I wouldn't have it any other way.

But, incorporating is a big decision and shouldn't be taken lightly. I suggest that you:
Review your long term goals.
Go over the advice I've given here.
Read the information in the links I've provided.
Talk to a CPA or other financial advisor.
Discuss the decision with your significant other, if applicable.

Only after you've looked at your options, then make the decision to incorporate, or not to incorporate. It's all up to you.