As a quick note, Rose Gordon, Stephannie Beman, and Melanie Nilles for answering my initial questions that helped me to get started. I also read through some useful information in a couple of books (which are mentioned in this blog post).
Another quick note: Whether or not to set up a corporation depends on your needs. It’s not something I think every author needs to do. 🙂
Another quick note: I have no idea what international tax and business laws are. This is what I did in the United States. I am not an expert. I am still learning as I go. For advice in your situation, I recommend finding an attorney who knows business and tax laws or Certified Public Accountant who is familiar with small businesses. (When in doubt, find someone who is qualified to answer your questions.)
So anyway, here are the steps I took. I’m not done yet, but at least I got the ball rolling.
1. I talked to an attorney who specializes in business and tax laws.
The initial meeting basically had to do with why I wanted to form a corporation, what I did, and what my needs were. Based on her recommendation, I went to the Certified Public Accountant who specializes in small businesses.
I found this attorney with prayer and an internet search. After that, it was based on a gut feeling when I talked to the receptionist. (Yes, I realize gut feelings aren’t objective, but I’ve learned long ago to trust my gut.)
2. I talked to the accountant the attorney recommended.
This was basically the same kind of meeting. I told him what I did and my income. Based off the conversation, he suggested I form an LLC with an S-Corporation election. Basically what it means is that I’m taxed as an S-Corporation and will become the employee and owner of the company. This gets a little tricky, and it took a week for me to wrap my mind around it. As the owner, I have to pay myself as an employee a set salary. This salary is subject to self-employment tax, plus all the other taxes that employees pay. The rest of the money (after the salary is paid) goes into the corporation. That is the part that isn’t subject to self-employment tax, but yes, I do pay taxes off of that too. Then after the corporation pays me (as the employee) and pays its expenses and taxes, what is left over is a “dividend” (which is another way of saying “profit”). I can then use that profit for personal expenses.
However, the IRS is pretty strict about the S-Corporation election so I had to give myself a “reasonable wage” based on what I do as a writer. I decided on my salary based off the advice of my accountant and some research I did on the median income a writer can expect to make. The income of a writer widely varies, so the input from the accountant played a key role in making this decision.
The accountant then recommended a payroll company called Paychex to handle the necessary stuff I need in order to pay myself as an employee.
But before I went to them, I went back to the attorney.
3. I went back to the attorney who filed the necessary paperwork for me to create an LLC with an S-Corporation election.
Yes, I could have done this myself, but I felt better about hiring the attorney to do this for me. Yes, it cost more to pay her to do it, but for me, it was the best choice. I went there twice. Once was to sign papers and give my payment to get the ball rolling so I could form the corporation.
The second time was to sign off on the corporation “Operating Agreement” (which I did read but will have to refer to from time to time to refresh myself on it), the “Certificate of Organization”, IRS form 2553 (to be taxed as an S-Corporation). She then filed and sent out the forms to where they needed to go. On this day, I also got my Employer Identification Number.
4. My next stop was to set up a business checking account with my local bank.
After I did this, I transferred my information at Amazon, Barnes and Noble, and Smashwords, so I could be paid directly to the corporation. For Smashwords, I get paid through PayPal, so I updated my new bank information over there, too.
5. I met with the sales consultant at Paychex.
Paychex specializes in payroll for small businesses. They will automatically take out my taxes as an employee every month and send that to the IRS. The only thing I will need to do is consult the accountant every quarter to figure out how much I need to pay in taxes from my corporate account (as the owner). Basically, the taxes I need to pay as an employee will be automatically taken out for me every month from Paychex. So I don’t have to figure any of that out.
What I have left over after I pay myself as an employee will need to go to the accountant to figure out the taxes I’ll pay four times a year to the IRS.
Paychex and the accountant work together so he can see everything that is going on to help protect me and make sure I am in full compliance with the laws.
A neat feature as an S-Corporation election is that I can actually hire an employee and have Paychex pay that person for me (so I never have to worry about figuring out that person’s taxes which will be automatically taken out and how much in taxes I need to match to it). It is mandated that I pay workers’ compensation, and I can do that through Paychex, too.
There are other things I can do with Paychex that include retirement plans and various insurance services.
I’m really excited about Paychex and the possibilities that are there because of their service. I’ve already set up an account with them.
6. I met with an insurance company that specializes in small businesses.
In addition to everything else, the attorney suggested I get small business insurance and recommended someone so I went to him. This is stuff that will protect my corporation from any lawsuits. I can also get workers’ compensation. Since he works with small businesses, he is able to tailor the insurance package to my specific needs.
7. I went back to the accountant to get a head start on 2013’s taxes.
For the past two years, I made the mistake of waiting until March to find out what I owed the IRS, and both times, it was a nightmare. In March of this year, I had to sell my new truck to make up for the money I didn’t have. This upcoming year, I refuse to be in the same situation. I want to be prepared well in advance so I can cover myself without having to resort to selling something. I saw him yesterday and have the dollar amount in my hand so now I can start January 1 with a fresh start. And I’ll work with him on the quarterly vouchers in 2014. All I know is that I never want to feel like I’m scrambling around in the dark ever again.
I’m not done yet. I still have to get comfortable with all of this, but at least I got started and am on my way. I don’t know if any of this will help someone, but just in case, I’m passing what I did along in this post.
There are some things I wish I had done a lot sooner. These were things the authors I mentioned in the first paragraph of this post recommended but I didn’t do because it sounded scary. I can’t say that I’m completely “in the know” about the ins and outs of everything, but I at least know who I can go to if any questions pop up.
If anyone is in the Omaha, Nebraska area and is thinking of forming a corporation for your small business (doesn’t have to be writing), I can recommend some good people to go to.