THE VALUE OF A LOAN-OUT CORPORATION
UPDATE COMING SOON: Nothing in this article should be construed as legal or financial advice. Bizparentz is currently working with a qualified accountant to update this article. This information may be outdated, but we offer it here as general information about incorporation. You may also want to read this article about why an actor (not targeted for child actors) might incorporate and the basics about the types of corporations by Sharon Gilday, CPA. m
Thanks to the recently revised tax laws, Bizparentz is asked about incorporation more than ever before. Incorporation is the process of establishing a “loan-out corporation” for the actor. Is this right for your child’s business? What kind of corporation should you use? Sole-Proprietorship, Partnership, C-Corp, S-Corp, Limited Liability Company?
The answer to this question comes down to one main issue – COST vs. BENEFIT.
There are various COSTS involved in establishing a loan-out corporation including legal fees to set up the corporation and related state and federal filing fees (one time out-of-pocket expenses) plus annual expenses for legal and accounting fees, as well as payroll and corporate income taxes. You will also pay Social Security and Medicare on those earnings (since you are now a self-employed person) and that can be more than 15%. For some of these issues, there is a big difference between setting up your corporation as an S corp and setting up as an LLC.
On the other hand, there are numerous BENEFITS that come with incorporating including a recently reduced corporate tax rate (as an example, in 2023 about 28% Federal plus 8.8% California state), the ability to establish a pension plan, the right to deduct business expenses (no longer tax deductible on your personal tax return), and medical expenses.
The newest and most compelling reason child actors are incorporating more than ever before is taxes. As an employee of a production company/studio you are the recipient of W-2 income and most employee-related business expenses, such as commissions, union dues, self-taping equipment, travel expenses, etc., are no longer deductible on a personal tax return. With a corporation, most business expenses are deductible. There are other benefits too: a corporation can set up an IRA or pension plan, saving significant tax dollars. It should also be noted that the standard of proof on a personal tax return can, at times, be greater than on a corporate tax return. In other words, the IRS generally respects the deductions of a corporation.
Of course, all of these benefits do come with a price – the COSTS. The costs involved with having a corporation also fall into three basic categories, initial legal fees, ongoing accounting/legal fees, and taxes. Initial legal fees (including State filing fees) to set up a corporation should run between $1,500 – $2,000, but there may be additional fees for the preparation of an employment agreement between you and your corporation.
Once established there will be annual costs to maintain and administer the corporation including legal fees for the preparation of corporate minutes, usually not exceeding $300 – $400 annually, and accounting fees that usually run between $2,000 – $4,000 per year and cover the preparation of all federal and state corporate and payroll tax returns as well as quarterly financial statements and tax planning. These fees can go significantly higher (up to 5-6% of your gross income) if “business management” services are also provided, although some firms are now charging a fixed monthly fee for these services rather than a percentage of gross income. Business management involves turning over almost all responsibility for your finances to a business manager. They, in turn, pay all of your corporate and personal bills, invoice production companies for your services and monitor the collection of income, assist with insurance and real estate issues, provide investment guidance, etc.
With respect to corporate taxes, while the State of California has a minimum annual “fee” of $800 for the right to do business in the state, there is no minimum federal tax and, when properly managed a loan-out corporation should not pay any federal taxes. Then there are payroll taxes. As an employee of a production company/studio Social Security and Medicare taxes are automatically withheld from your paycheck. Your employer (the studio) then matches that amount and forwards the entire amount to the Social Security Administration. In addition, your employer also pays federal and state unemployment insurance on your behalf. With a loan-out corporation you are still the employee, but your corporation is the employer (instead of the studio) and is liable for the payment of all payroll taxes including matching amount of Social Security and Medicare taxes. Payroll taxes are based solely on the salary you receive from your corporation and will, of course vary with your income level.
In sum, you can expect to spend approximately $1,500 to set up a loan-out corporation plus an estimated $12,000 per year for accounting/legal fees and taxes (all of which are fully tax deductible). Now, while this may seem like a heft price to pay, under the right circumstances the tax savings will more than make up for it. Which brings us to the million dollar question…
“Is a loan out corporation right for me?”
The answer depends on your income, and your child’s ability to maintain that income for years. In general, the point at which it makes economic sense to set up a corporation, e.g. when the benefits outweigh the costs, is when your annual income is approximately $120,000. For most child actors, that happens when they book a TV series or a series of major movie roles (implying there may be continued revenue for several years). However, under certain circumstances, it can make economic sense for individuals with annual incomes of as little as $80,000. The more difficult question for many in the entertainment industry is “What will my income be next year?” These are tough questions but ones definitely worth discussing with your tax professional.