Alright folks, today on The Dream. Work. Film. Podcast we are going to be talking about, cue the scary music, TAXES. Now I know this topic is hard for many of us artistic folk, who usually are not the most financially savvy, myself included.
But here’s the thing, learning how taxes can work for you, and not against you, as a budding filmmaker will actually end up saving you a ton of money in the long run.
Now let me start this podcast off with a little story. Two years ago, yours truly, crowdfunded nearly $10,000 dollars on the fundraising platform, Seed&Spark. I’ll tell ya, when those donations all cleared, my bank account had never looked so good. It was a dream come true, being able to have the funds to work on my dream series, The Dreamers. I was able to pay all my actors and crew, I was able to buy food for every time we were on set, and I was able to pay for some pretty awesome locations. Unfortunately, even though I had spent all $10,000 of those funds, it didn’t look like that in the government’s eyes. In the man’s eyes, I had received $10,000 worth of income, end of story. And when tax time came around I owed them about $1,000 in taxes. What? I thought. But I didn’t have the $10,000 any more! It was all spent on this project that I put my heart and soul, and all $10,000 into!
Unfortunately this whole thing could have been avoided had I done a bit more homework. $1000 later in taxes, I had no choice but to pay it because I hadn’t kept track of where that money went. It was nightmare guys, I’m not going to sugar coat it.
So now I am here to help you avoid that situation entirely. To teach you the options you have as a filmmaker to receive income, and how set up a system to help you track your expenses so that come tax time, the government will have no right take a share of the money you spent on your dream film project.
First we’ll discuss some simple business structures that you can form, and then we talk about how to work through your taxes in order to avoid the government taking a share of your crowdfunding income.
Okay, let’s talk about your business structure. As an indie filmmaker you a few options to choose from. You can be a sole proprietorship, a limited liability company, or a corporation. On this podcast we are going to discuss the simpler business structures, Sole Proprietorships and Limited Liability Company.
Let’s start with Sole Proprietorships.
What is a sole proprietorship? It is the simplest business form under which you can operate a business, or make your film. Keep in mind, this is big thing, a sole proprietorship is NOT a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts. That means that there is no difference on paper, between the business and YOU. So you can reap 100% of the benefits of any profit made, but in turn you are fully responsible for any debts that your business or film accrues.
One of the pros of forming a sole proprietorship is that you don’t. You just ARE a sole proprietor if you run a business or are making a film. You do not have to take any formal action to create a sole proprietorship. It is the simplest and cheapest business structure to establish. As long as you are the only owner, this status automatically comes from your business activities. In fact, you probably already own one without even realizing it. If you are a freelance writer, photographer, actor, or ding-ding-ding FILMMAKER, you already are a sole proprietor.
Another plus is the pass-through taxation of a sole proprietorship, meaning all income is passed on to you personally and taxed only once, and we will get into this more after we discuss the next business structure, Limited Liability Corporations.
So let’s dive in a bit more into the cons of sole proprietorship, which I mentioned just a moment ago.
First and foremost, unlimited personal liability. This means that because there is no legal separation between you and your business, you can be held personally liable and responsible for any debts and obligations of the business. Meaning if anyone gets seriously hurt on set, YOU are the one they are going to sue and come after for compensation. Creditors can come after your personal property if your business assets cannot cover the issue. Pretty scary right?
And that is a heavy burden. I mean no matter what, that would be a terrible thing to happen, but if you are a sole proprietorship there will be serious consequences on you personally.
So just to reiterate - sole proprietorship, virtually no set up fees, the simplest business structure to have, but there is no legal separation between you and your business which can mean bad news bears if you were to ever deal with a serious legal issue concerning your business, or in this case, your film project.
Alright let’s move on to talking about Limited Liability Company, or LLCs, and more specifically for crowdfunding filmmakers, single-member LLCs.
What is an LLC? An LLC is a business structure that partners pass-through taxation (just like a sole proprietorship) with the limited liability of a corporation. And what does limited liability mean? Well unlike the sole proprietorship, if someone were to hurt themselves on set and you were to get sued, they would be suing your LLC, not you. So there is PROTECTION there for you personally from debts and conflicts related to your film project when you form an LLC. But remember, An LLC is NOT a corporation—it is a legal form of a company that provides PROTECTION and LIMITED LIABILITY to its owners. LLCs also can have more than one member of the business, unlike a sole proprietorship. So if you wanted to form an LLC with your producer or another member of your film team, you can do that. I myself formed a single member LLC, which made things very simple for me come tax time.
Okay, let’s talk a bit more about the cons, or I should say, the CHALLENGES of choosing an LLC.
Setting up an LLC requires a bit more grunt work. There are many sites you can use to help you set up an LLC online. I used LegalZoom to help set up my production company for THE DREAMERS, and let me tell you guys, it was a total breeze. Yes it cost me money, but you are able to make the payment in installments at no additional fee. Their prices are very reasonable and offer a lot of perks versus trying to figure out how to file everything yourself with the state, which I do not recommend doing.
Another challenge of choosing to do an LLC is the STATE in which you form your LLC in. The thing is, every state has a different set of rules for an LLCs that is formed within them. Be sure to do some thorough research on your state’s filing fees and requirements. For me, to file in Wisconsin in 2014 through Legal Zoom, and officially form my LLC with a registered agent it cost me about $590 in total, and again I spread that payment out over a few months. You might gawk at that number, but look my friends, if this is your dream, if this is where you want to go with your career and profession, then take the leap and make the investment. You won’t regret it.
Another aspect of creating an LLC is choosing a registered agent. What is a registered agent you ask? A registered agent is a responsible third-party who is registered in the same state as your LLC, they accept tax and legal documents on behalf of your business, and make sure you don't miss important information regarding tax payments, lawsuits, or judgments involving your business. They’re like a secretary for your business or film project. Most states automatically require all LLCs to have a registered agent, and I strongly recommend having one. Another thing is if you chose to create your LLC in a state you don’t actually live in, you are required to have someone receive documents and paperwork on your behalf that live within those state lines, aka a registered agent. If you choose not to have a registered agent you may risk falling out of "good standing" with the state where you registered. There are serious penalties to this which can include fines and the inability to enter into legal contracts or gain access to the state court system. Woof, guys. I chose LegalZoom to act as my registered agent which is an option you can choose on their website as you begin the process of forming your LLC through their services, and let me tell you, it has been just the loveliest of business relationships.
Another things to keep in mind when forming an LLC is that you will have to file an Annual Report. Now this is a lot less intimidating than it sounds, I promise. Many states require LLCs to submit annual reports that simply serve to keep the state informed of the company's management and other basic information. So for example, Connecticut LLCs are required to submit an annual report which simply lists the address of the company; whether it's a domestic or foreign company; and the name and address of at least one member of the LLC. Usually, this type of report is accompanied by an annual fee. For me, I had to just submit how many members were involved for 2014, which was me, give them my current address, and pay a filing fee of $25. Easy peasy mac and cheesy. I did it in under 5 minutes right on Wisconsin’s Department of Financial Institutions website. Again, let me stress how important it is to factor in all your state’s requirements when forming an LLC. Some states are a bit more complicated than others when it comes to filing an Annual Report.
The last thing you will have to do as an LLC is file for an Employer Identification Number, or an EIN. What is an EIN? Just like the IRS requires people have social security numbers, they also require LLCs and Corporations to have their own social security numbers, which is what an EIN is. The EIN is 9 digits long and is used when filling out things like W-9s and is used on your tax forms. You can create your own EIN right on the IRS website for FREE. I know with LegalZoom they try to up-charge you to let them do it, don’t, save yourself the money and spend five minutes going through the steps on the IRS website.
So now let’s get to the meat. As I mentioned before Sole Proprietorships and Single Member LLCs allow for pass-through taxation. What that means is when an LLC has only one member, or you are operated as a sole proprietor, the income passes through the business and is reported on the owner's personal tax return.
This makes for Easy tax preparation. This is where that crowdfunding income comes in! Come tax time, your business is not taxed separately, so it’s extremely easy to fill out the tax forms as a sole proprietorship and single member LLC.
Let me reiterate that again for you, because you and your business, or your film project, are technically the same thing, the business is not taxed, you are personally taxed. The business income is YOUR income, the business expenses are YOUR expenses. No distinction on paper.
So let’s break this down into actionable steps for you. Come tax time what you will do is fill out a Schedule C, a Schedule C is a tax form that you can download for free right from the IRS website. On this form you report ALL your expenses for the year the incurred because of your business- MEANING all those costumes and coffee runs and props and locations that you paid for with that crowdfunding money. The Schedule C form looks a bit daunting, but if you have been organized with your expenses throughout your shoot, it will be a breeze to fill out.
The other form you fill out as a sole proprietor is the Form 1040. Which is the standard form that everyone fills out, and you may have already filled it out yourself, or had someone like TurboTax do it. The “bottom-line amount” from Schedule C transfers over to your personal tax return. You also have to include a Schedule SE, or Self Employment Form, when filling out your taxes for the year. Then from there, it’s your responsibility to withhold and pay all income taxes, including self-employment tax.
So what exactly is Self - Employment tax? This is the biggie guys. THIS is where I got hit real bad with my $1000. Self Employment tax is a Social Security and Medicare tax for individuals who work for themselves, like we indie filmmakers. It is similar to the Social Security and Medicare taxes withheld from the paychecks of most people who work a quote unquote “normal job”. Keep in mind, this is DIFFERENT than income tax. Anytime the someone says "self-employment tax" it only refers to the aforementioned Social Security and Medicare taxes, NOT income tax. So right now for 2015, Medicare tax is at 2.9% and Social Security tax is at 12.4%, for a whopping total of 15.3% for Self Employment Tax.
So how does this all affect your crowdfunding income? Let me break it down for you. The Schedule C Form helps you figure out your NET PROFIT from being self employed, or crowdfunding your film. You must include this net profit as income on your Form 1040 and USE it on Schedule SE form to calculate your self-employment tax. And what is your net profit? Your net profit is equal to the total revenue you made, meaning your crowdfunding funds, MINUS all deductible business expenses you have racked up, meaning all the the things you spent your crowdfunding income on to make your film a reality. SO, and here is the whole point of this episode my dears, the LOWER your net profit number is, the LOWER your self-employment tax bill will be, and the LESS money you will owe come tax time.
THIS is why it so important to keep track of your expenses guys! Save all those receipts throughout the pre-production, production, and post. Start a Google Spreadsheet or Excel Spreadsheet as soon as this podcast is over and start keeping track of your purchases and get yourself organized. I did it, I am still doing it, and it saves me a HUGE headache come tax time. And the upside to paying for an LLC is that you can WRITE IT OFF AS AN EXPENSE. That’s right, by paying to form an LLC, that expense is something you can include as an expense on your spreadsheet.
Now, there is always the option of hiring a company like TurboTax or H&R Block to help you out with your taxes. But the things is, you STILL need to keep track of your expenses and have them properly organized so that these companies can fill out your tax forms accordingly. For 2014 I myself hired a CPA, meaning a certified public accountant, who filled out my Schedule C, my 1040, and my Schedule SE all for $200. BUT this amazing accountant needed all of my expense and income information in order to do it correctly. Do a little research and see if you can find a CPA in your area to help you, but again, you need to be organized throughout the year in order to reap the benefits of saving yourself from owing the government. Also, not to mention, you can write of the expense of a CPA on your taxes as well.
So here’s the happy ending to this podcast. Remember that story I told you earlier about paying nearly $1000 in taxes after crowdfunding? Well when I did a post-production crowdfunding campaign in early 2014, you better believe I was ready for taxes this April. After becoming an LLC, keeping my expenses organized, and hiring a CPA, I owed less than $200 in taxes to the federal government. Yup. Pretty awesome.
Okay guys, I know that was a LOT of information to digest, but hey, it’s this kind of information that is going to legitimize your film, your production company, and take you one step further in making this a career and not a hobby. So thanks for listening and here’s to living the dream!
Tune in again for another Dream. Work. Film. Podcast How-To episode, and learn exactly categories to use when organizing your expenses to stay in good standing with the IRS, and take another step towards making tax time even easier on your wallet.