This is a question for the collective here at myFICO, and yes, I've already sent the same question to my accountants, but have yet to hear back.
Situation:
I'm about to self-publish a book which should hit the market in the next six to eight weeks, and by then I estimate I will have between five- and six-thousand dollars invested in editing, cover designs, registrations, typsetting, and other costs. While any significant royalty income is far from assured, possibly not even enough to allow me to recoup my initial investment, the feedback from the folks who've read the manuscript indicate it is a compelling and highly engaging read, so yeah, I have high hopes.
Question:
The reason for my ask here is for advice regarding setting up an LLC/Subchapter-S corporation for tax purposes. I am currently employed and make more than enough annually to have my wages cover all of my required FICA withholdings, so the only real benefit to starting a small company would be to avoid additional Medicare contributions and NIIT (Net Investment Income Tax), at least for the next couple of years before I retire. So, for any of y'all who are still working and gain additional income from royalties, how do you arrange everything for tax purposes? Do you simply report the 1099 income on your 1040 and then file a Schedule-C with your expenses, or do you have a small corporation to receive the income and pay the expenses, and then pay yourself a "reasonable" salary, taking the remaining profit as a distribution?
@Realist wrote:This is what we pay CPAs for, because we don't know the finer details of what may allow or disallow. I would suggest to line one up on your side and get an opinion. At least someone willing to sign their name, and hold themselves up as a representative should a tax audit event ever occur. Many times in my life, these decisions have saved thousands.
When creating a business, you can have doing business as. You can have an LLC. You can have an S-Corp, or a C-Corp, and each one is going to offer you unique differences and protections. I've filed every way with exception to C-corp. But unless you are a professional in tax law, or working within that realm, you can estimate what you owe, but you don't easily determine what taxes you can "avoid". Tax avoidance is legal. Tax evasion is illegal. Allow your tax advisor to determine what avenue is best for you.
I could offer you my opinion, and it might be correct. But, it also might not be. Or it may leave you missing out on something you didn't take advantage of.
Thanks @Realist! I reached out to my CPA a few weeks ago and after a few back-and-forths to discuss options, we determined the best course of action was to do nothing for this year (the book will likely only hit the market in November, so any sales won't be all that impactful), and then next year, if sales start generating meaningful income, look at an LLC/S-Corp. Even then, my CPA is suggesting to not file unless "meaningful" income is at least six-figures per year (which would be nice, but I suspect a tad unlikely).