Fiverr Taxes: Incorporating, Invoicing Clients, and the Law for USA (and Global) Part 1:
I have had to sit down with my legal representation now that we’ve grown on Fiverr as a great platform for our business. It’s unbelievable that Fiverr has been so huge for our business - Taxes can be a problem, and since I was fortunate enough to study Business Law and Corporate Taxes (J) in my studies at CAL State University I thought this could prove beneficial for those from what I’ve learned.
Let’s face it, IRS are the three scariest letters in the USA - they can seize your bank accounts, have unlimited access to your bank account information, and even more recently - access to your health care records for “tax purposes”. With the growing size of the government, and it’s ever growing teeth in the commerce - you would be a fool not to plan your business around the web of tax laws, especially in the United States of America. If you expand on Fiverr, and grow larger, you might have a winning idea to bring people into the business, start raising capital and incur risk expanding your business. If this is the case, you’ll want to make sure you have “Limited Liability” so that if you get sued, or company goes broke - Mr. Government or Bank can’t come after your house and children!
CAUTION: This is in depth, so here is a summary for those who’s eyes immediately popped out after a wall of text: Our company did a Limited Liability Corporation (LLC) which accommodates our partnership and creates a limited liability for monetary loss. It gave us a separate Tax ID or UBI so we can open up a bank-account and keep personal income separated from VA Staffer. It gave us the ability to invoice our clients with our company and not an individual so we don’t have to worry about the tax man at the end of the year - because if you want to write off expenses, separating business from personal is essential.
You’re probably asking yourself "Should I Incorporate a Business for Fiverr Earnings, or should I run it as a Sole Proprietor?"
This one is what my guru and I sat down to discuss - If you want to run this legitimate, then you need to have this figured out. There are tax advantages to different types of business structures and you’ll need to find the one that suits you best:
a) 99% of you are Sole Proprietors which are unincorporated businesses: They are also called independent contractors, consultants, or freelancers. There are no forms you need to fill out to start this type of business. The only thing you need to do is report your business income and expenses on your Form 1040 Schedule C. This is the easiest form of business to set up, and the easiest to dissolve. (An LLC with only a single shareholder, a so-called single-member LLC, is taxed as a sole proprietor on a Schedule C.)
Fiverr Taxes: Incorporating, Invoicing Clients, and the Law for USA (and Global) Part 1:
Fiverr Taxes: Incorporating, Invoicing Clients, and the Law for USA (and Global) Part 2
Sole proprietors are taxed on their net income (after subtracting any allowable business expenses from their gross sales income). This net income is subject both the federal income tax and to the self-employment tax (which covers the Social Security and Medicare taxes). Sole proprietors are self-employed. The cost of health insurance is deductible against the federal income tax, but is not deductible against the self-employment tax. Losses in a sole proprietorship offset other income on the owner’s personal tax return.
b) C-Corporations are incorporated businesses: The shareholders of C-corporations have limited liability protection, and corporations have full discretion over the amount of profits they can distribute or retain. Corporations are presumed to be for-profit entities. Corporations must have at least one shareholder.
C-corporations are taxed on their net income (that is, gross income minus allowable deductions for various business expenses). C-corporations have their own corporate tax rates (which are structured differently than personal tax rates). Shareholders who perform services through the corporation are employees, and pay federal income tax, Social Security tax, and Medicare tax on their salary. The post-tax net income of the C-corporation can be distributed in the form of dividends, which is taxed to the shareholder. The C-corporation can decide how much to distribute in the form of dividends. Dividends are taxed at a special “qualified dividends” tax rate of 15% or 20%. Dividends from a corporation are thus taxed twice, once at the corporate level and again at the shareholder level. Shareholders receive income from the corporation either in the form of salary or in the form of dividends. Health insurance benefits provided to shareholder-employees in a C-corporation are pre-tax for the federal income tax, Social Security tax, and Medicare tax. Losses offset taxable income of the C-corporation by being carried back or carried forward to other tax years.
Fiverr Taxes: Incorporating, Invoicing Clients, and the Law for USA (and Global) Part 3
c) S-Corporations are a type of corporation: The shareholders of S-corporations have limited liability protection, and the corporations has full discretion over the amount of profits they can distribute or retain. An S-corporation must have at least one shareholder, and cannot have more than 100 shareholders. The net income of the S-corporation is imputed as income to the shareholder, even if the S-corporation decides to retain some or all of the net income.
S-corporations generally don’t pay any corporate tax. Instead, S-corporations divide their net income among their shareholders, and the income is taxed on each shareholder’s personal tax return at ordinary tax rates. Shareholders who perform services through the corporation are employees, and pay federal income tax, Social Security tax, and Medicare tax on their salary. The S-corporation can decide how much of the net income is distributed to shareholders, which may differ from the amount of net income imputed as income to the shareholders. Health insurance benefits provided to shareholder-employees in an S-corporation are pre-tax for the federal income tax, Social Security tax, and Medicare tax. Losses from an S-corporation can pass-through to the shareholder and offset the shareholder’s other income on their personal tax returns.
d) Partnerships are unincorporated businesses. Like corporations, partnerships are separate entities from the shareholders. Unlike corporations, partnerships must have at lease one General Partner who assumes unlimited liability for the business. Partnerships must have at least two partners. The net income of the partnership is imputed as income to the partners, even if the partnership decides to retain some or all of the net income.
Partners in a partnership are taxed on their net income (gross sales income minus any allowable business expenses). This net income is then divided among the partners and is taxed on each partner’s tax return. Partners who perform services through the partnership are self-employed, and just like sole proprietors, have both the federal income tax and the self-employment tax apply to their share of the partnership income. Partners are paid when the partnership distributes net income to the partners, which may differ from the net income imputed as income. Health insurance benefits provided to partners are tax-deductible for the federal income tax, but not for the self-employment tax. Losses from a partnership may offset other income on the owner’s personal tax return.
e) Now I doubt many of you are Non-Profit, but I’ll include anyways: Nonprofits are corporations formed for a charitable, civic, or artistic purpose. Nonprofits are generally exempt from federal and state taxation on their income, and so they are often called “exempt organizations.” Nonprofits reporting their activities, income, and assets to ensure that they are in compliance with federal and state laws governing charities.
Fiverr Taxes: Incorporating, Invoicing Clients, and the Law for USA (and Global) Part 4
So now for the Limited Liability Protection:
The major legal consideration in choosing a form of business is limited liability protection. Limited liability means the owners of the business are only liable for the capital they have invested. Let’s say my company is sued for $1 million, but as a shareholder I have invested only $10,000. With limited liability, the most I can lose is the $10,000 I have invested. My personal assets (house, car, bank account) cannot be touched. Limited liability is available for C-corporations, S-corporations, Limited Liability Companies, and limited partners in a Limited Partnership or Limited Liability Partnership.
General partners in a partnership and sole proprietors, however, have unlimited liability. Creditors and lawsuits can go after the owner’s personal assets (real estate, bank accounts, etc.). As such, general partnerships and sole proprietorships are appropriate for businesses with small risk for liability exposure. If you are at risk of being sued for accidents, bad decisions, or property damage, you should consider whether the limited liability features of different business entities offer the level protection you desire.
TLDR version - for those who’s eyes immediately jumped to the end after a wall of text: Our company did a Limited Liability Corporation (LLC) which accommodates our partnership and creates a limited liability for monetary loss. It gave us a separate Tax ID or UBI so we can open up a bank-account and keep personal income separated from VA Staffer. It gave us the ability to invoice our clients with our company and not an individual so we don’t have to worry about the tax man at the end of the year - because if you want to write off expenses, separating business from personal is essential.
I can offer more tax advise (and not a gig :P) right here to help you guys out. I’m not new to business, but I am new to Fiverr - I’m a level 1 seller as of tomorrow and a level 2 seller on my personal account (this here is specifically for our business VA Staffer)
Please feel free to respond accordingly, I promise I’ll check periodically with any advice I can give on how to get started and what you need to do in order to enjoy all the tax benefits of running your business legitimate on Fiverr.
Have a great day!
CEO VA Staffer | Virtual Assistant Staffer
Thanks for the info. I got much of my tax filing information as a sole-proprietor from the IRS website on the section titled “Individual/Self-Employed”, which also includes links to any tax forms which might be needed.
Even with more complex tax laws, I have to say that it is SO much easier to do taxes as an independent contractor, with the IRS on the internet, than when I did it for a number of years in the late 1980’s. Yikes, all the math and percentages and legitimate deductions…plus figuring out vehicle depreciation…ack!
Death and taxes: hard to avoid~
Yes - it is the most convenient - but if you start making a considerable amount of money it is the highest taxed rate. Also because you are technically “Self-Employeed” you must pay Uncle Sam 15% Social Security tax on-top of your income tax.
Wow, good to know. I also am trying to avoid the tax man as much as possible.
I am worried about the very steep self employment tax I will have to be paying this year and am seeking out deductions and buying computers and equipment to reduce taxes.
RE: access to your health care records for “tax purposes” -
the IRS does not have access to your health care records as I understand it, just whether or not you have health insurance.
RE: limited liability for monetary losses
Do you mean loans? Usually you have to guarantee these personally unless you have business collateral. That includes having business credit cards, they still want YOUR social security number. If you mean investors then yes that is a good idea, to have an LLC.
Any ideas on how to have deductions for the self employment tax are welcome. I will be taking a deduction on use of my home for my business, as well as what I pay for my internet connection.
There are benefits to being a sole proprietor such as not having all the paperwork involved in having a corporation or LLC. And it would have to be something serious you have done wrong to have someone from Fiverr try to get your name or address for the purpose of suing you. The worst that could happen is someone wants a refund as far as I can tell so far.
RE: Access to Healthcare records for “tax purposes” -
Looks like he’s right http://www.washingtontimes.com/news/2013/may/17/irs-sued-seizing-60-million-medical-records/
Turns out the IRS seized 60 Million healthcare records for exactly that reason - “tax purposes”. Now that there’s “deductions” and “incentives” based on your income, they have access to financial records - and vice versa it looks like.
That was a case where the IRS stole medical records illegally and got sued for it, they do not have a right to violate the privacy of people’s medical records…
They have always had access to your financial records. You have to give them access when you pay taxes.
Not sure if this is still active. Thank you for the information, really valuable.
Just had the question that if I already have an LLC established separately for other contract work I do, do I need to make a new separate one for Fiverr?
I’m not a lawyer or accountant, just offering a layperson’s opinion. I don’t see any reason to do that. As long as your document that you created the LLC with has listed in it’s description the ability to do whatever it is you do on fiverr, it seems to me you can use that for your fiverr earnings.
However if the things you do in your LLC are different from what you do on fiverr you might have to modify that document that you created it with, if that is allowed in your state.
It would also depend on how many shareholders you have and whether or not they agree to including your activities in that LLC although you probably are the only shareholder.
That really helps and makes sense. Thank you so much for the information! Really appreciate it!
Its very helpful. Thank you