DISCLAIMER: This article does not serve as legal advice. We highly recommend working with your CPA to figure out what is best for your situation.

My name is Derek Sepe, and as a freelance production sound mixer, I have my own small business LLC or “Loan-Out” that I utilize throughout the year for payment and business transactions. In the six years it’s taken me to get to where I am professionally, I have been figuring out how to run the “business” of me. While of course there will be more growth down the road, I have finally reached a place where everything is running smoothly — which brings me to taxes and how it all works with my Loan-Out.

How a Loan-Out Company Works

A Loan-Out company is a legal business entity established to provide the personal services of its owner (the freelancer) to third parties (productions). Essentially, if you’re a sound mixer like me, it creates a paper trail to show that when a production contracts your LLC, your LLC then passes some of the income to you. Simple, right? Kinda…

When I’m hired on a production, I come with all my own gear to work and record sound. You might think there’s nothing out of the ordinary about that, but there is some degree of nuance involved when I send invoices.

Let’s say Production X hires me both for my services as a sound mixer, and for gear rental. Over the course of the shoot, the production pays me $25,000. Great! But I don’t invoice them as Derek Sepe, the individual. I invoice and run payroll through my Loan-Out, so that everything is paid to my LLC. Then, my LLC needs to pass some of the profits it received down to me as earned income — hence the term “pass through entity.”  By structuring this way you do not have to treat all earnings as FICA taxable as you would if you were a sole proprietor (Schedule C). The balance of any profits are taxed as a return of your investment similar to a dividend from a publicly traded C Corporation but you can draw on those earnings when needed. With this structure you are tax planning and using the tax code to your advantage.

The Basics of Starting Your LLC

Start by choosing how you want to organize: 

1. As mentioned, an LLC (Limited Liability Company) is a legal entity with its own rights and obligations separate from the owners, who are usually not personally responsible for the LLC’s debts and lawsuits. This offers some degree of protection to the freelancer. In addition, LLCs generally have more flexibility in how they operate, as opposed to corporations (Inc). This article might help you decide which route to take.

2. Once incorporated, you can select how the LLC will be taxed. By default, as a single member LLC, you will likely be taxed as a sole-proprietor where any income is reported directly on your individual tax return through Sch C. However, if elected to be treated as an S-Corp, you would pay personal income tax on profits, and all business income and/or loss from the LLC would be passed through to you via what is called a Schedule K-1 and reported on a Schedule E form. This is the Loan-Out model. 

3. The state you live in could greatly affect your cost to incorporate. But it’s good practice to incorporate in the state you plan to do most of your business. Below is an example of costs just to incorporate between three different states as of 2020.

• • • • CA: $115 to incorporate, $100 for an initial report, $25 annual report, $800 annual LLC tax, $50-100 for a small business license depending on your location, a California LLC fee of $85 + $20 filing fee
      • KY: $50 to incorporate, $15 annual report, minimum $175 LLET fee
        • 6% Sales & Use Tax on all gross receipts
          • Resale Certificate may be possible for Sales & Use Tax
      • WA: $200 to incorporate, $10 for initial report, $20 business license application, $60 annual report
        • 1.5% Business & Operations Tax of all gross receipts
          • Small Business Tax Credit possible

4. You’ll also need to apply for an EIN (Employer Identification Number) from the IRS, which is free. And don’t forget any administrative costs in case you get an office, internet, supplies, website, PO box, etc. Check out our previous article about things to consider when forming an LLC.

As a sound mixer, I run every job I’m contracted to do through my Loan-Out and if necessary, invoice the production. I itemize as much of my rate as I can by renting my LLC’s assets (my gear). The rest is itemized as my labor rate. The more money I can classify that won’t be taxed as personal income, the better for my tax situation.

So why go through all these hoops when I could just work as a freelancer from one job to the next? As a self-employed freelancer/independent contractor, I’m responsible for both the employer and the employee portions of FICA tax on all personal income, totalling 15.3%. In this Loan-Out structure, passing some income from my LLC, I can better manage how much of my income is subject to FICA tax, as I’m only taxed on what the LLC passes to me. I can further reduce tax liability with a plethora of itemized deductions and write offs I keep track of throughout the year.

Is a Loan-Out Right for You?

This is ultimately for you and your CPA to decide, but consider some of the pros and cons in the evolving world of “gig economy.” Having an LLC is a way to protect [yourself] and lease out your assets and services, especially if you find yourself dealing with any debts or lawsuits. The tax benefits alone may be worth it to incorporate, particularly if you’re making $100k or more per year. It also looks good to show some steady income, since as a freelancer, recurring paychecks can be infrequent. If you want to buy a house, for instance, it’s beneficial to show a bank you have capital to take out a home loan.

On the negative side, you have a lot more overhead and business tasks to take care of. In order to stay on top of everything you’ll need to keep meticulous records, save all receipts, probably file quarterly taxes, and likely get an accounting software to generate Balance Sheets (BS) and Profit & Loss statements (P&L) for your CPA. You’re also more susceptible to being audited by the IRS with a Loan-Out. The IRS has an entire division devoted to sniffing out small businesses trying to evade taxes, but if you’re running a scrupulous operation you have nothing to worry about.

If you haven’t been able to deduce by now, figuring out how to run yourself as a business and filing taxes as a freelance filmmaker is a complex process, and this article is only scratching the surface. It’s best to work with a CPA in the state you plan to incorporate, because they know the nuances of the tax codes that you’re going to be held accountable to.

Got questions? Leave your comments below, and we’ll see if we can lend any insight!