As a Freelance Animator, Should I File Taxes As Self-Employed or a Corporation?

Question: As a Freelance Animator, Should I File Taxes As Self-Employed or a Corporation?

We've looked at a lot of the pains that come with freelance animating, including the dreaded self-employment taxes that come with working as a freelancer under United States tax law. For some, registering as a corporation can be a way to save on expenses and limit personal liability in the event of any problems. But is it right for you to register as a corporation, or should you continue to file as self-employed?

Answer: It really depends on your situation. For many, self-employment taxes are extremely high because they aren't working for a company that compensates for part of their tax burden - but what most don't realize is that often, corporate taxes (when you're the corporation) can be even higher. The benefit of corporate taxes, though, is that they allow you to claim more deductibles and limit the income that's actually considered taxable. Before you consider registering as a corporation, you should consider several things:

Will this actually save you money?
When registering as a corporation, the most common type for freelancers is the LLC, or Limited Liability Corporation. No matter how you register, though, it still costs money to file your registration. Depending on the type of corporation, this can range from a few hundred dollars to well up into the thousands. The initial investment may be worth it, though, if you do find that you'll be saving money as a corporation as opposed to a standard freelancer / self-employed individual.

Will your deductible expenses make this worth it?
Continuing in the vein of the previous question, registering as a corporation is often only worth it if the amount saved from claimed deductions outweighs the higher amount of taxes owed to the state and the federal government under the corporate umbrella. If you can't claim many more expenses than your computer or art supplies, it probably won't be worth it. If you have exorbitant software costs from high-end programs (that you actually pay for as opposed to pirating, as it is illegal to claim an expense for software you didn't actually pay for), if you travel to client sites rather often, if you have side expenses from entertaining clients, or if you have extremely high materials costs from large-scale productions involving animation tools, cameras, and other equipment (not to mention sound stages and who knows what else), you may actually benefit from the cost savings from these deductibles.

Do you qualify as a small business?
Federal and state governments often make special provisions for small businesses to encourage economic development in troubled areas. You may want to check online to see if you qualify as a small business and can take advantage of those provisions to save money or further build your business as a registered corporation.

Do you have employees or subcontractors?
You may have started off as a one-person operation, but as you took on new projects, you ended up bringing in occasional or even full-time help, ending up with your own stable of subcontractors or even a full-on animation studio. When a portion of your profits goes to pay others, your tax situation gets a lot more complicated, as does your level of liability. Registering as a corporation can help keep a clear division regarding company funds and payroll, and limit your liability - though depending on the type of corporation you register, you may also be liable for a portion of your employees' taxes.

Do you intend to do this long-term?
Some people start off freelancing just to make ends meet, and end up making a career out of it; some only do it temporarily until something full-time comes along. If you're planning to work for someone else's company, it likely doesn't make sense to go to the trouble of registering as a corporation just for a few short-term gigs. If you intend to strike out on your own for good, though, you may want to look into the benefits. Even after considering these questions, you may want to talk to a tax consultant or lawyer. Make sure to bring all receipts and financial statements that may have impact on your eligibility for deductibles and allowances, so they can help you make the decision that's right for you.