Putting the “S” in S-Corp – What Online Sex Workers Need to Know

February 7, 2023 | By Jessica Goedtel, CFP®

Let’s play two truths and a lie.

“You need an S-Corp for your OnlyFans. It’ll save you money on taxes, plus you’ll get to deduct lots of expenses. It’s easy!”

Truth: An S-Corp may save you money on taxes.

Profits for S-Corps aren’t subject to self-employment taxes. You may have seen these before on a paycheck. Same taxes, but this time they are doubled because you’re paying both the employer and the employee portions. Here’s a breakdown of the components:

• Social Security taxes of 12.4%. The good news is that this tax is capped at $160,200 of net earnings for 2023, or a maximum of $19,864.80. Well, maybe not good news. But it could be worse.
• Medicare taxes of 2.9%. Unlike Social Security, this tax goes up. It increases by .9 percent if you earn over $200k per year ($250k if you’re married).

That’s just on the profits. You will still have to pay yourself a salary that’s reasonable, which will be subject to those taxes. More on that in a minute.

Truth: An S-Corp will allow you to deduct lots of expenses.

I’m cheating a little here as this is only partially true. You can deduct expenses that are ordinary & necessary to your business. Having an S-Corp does not give you carte blanche to deduct personal expenses or even all your business expenses. Many business expenses have extra rules on when they are deductible (such as travel, clothing, and home office expenses).

You also don’t need an S-Corp to deduct business expenses. You don’t even need an LLC. If you’re operating with an intent to profit, you’re eligible to deduct certain business expenses.

Lie: Running an S-Corp is easy.

If it sounds too good to be true, it probably is. An S-Corp election may be able to save you in taxes, but there are challenges.

• Profits. You need to be making money, first and foremost. A good amount too, because the tax savings with an S-Corp is on the profits after paying yourself a “reasonable” salary, which leads me to the next challenge…
• What is even a reasonable salary? The IRS says this is the value that would ordinarily be paid for like services by like enterprises under like circumstances. The income of adult content creators can vary wildly. The closest approximation available on the Bureau of Labor Statistics, Entertainers and Performers, has an annual mean wage of $71,870. This is just a starting point. Many factors go into determining reasonable compensation and the IRS will go over them carefully in the event of an audit.
• Increased administrative costs. Paying yourself a salary means you’ve got to run payroll ($500 – $1,000). You’ll need to find an accountant who specializes in S-Corp taxes (anywhere from $800 – $3,000, and you really get what you pay for here). You’ll also need to keep a very clean set of books, which means at a minimum robust accounting software ($50 a month) to bookkeeping services ($150 – $500 a month). I don’t recommend attempting your own bookkeeping, payroll, or tax preparation to save money. Your time is valuable and better spent on generating revenue.
• State issues. Some states assess more taxes on S-Corps. For example, California assesses an additional 1.5% tax on net income from S-Corps.

The bottom line. Making an S-Corp election isn’t a magic bullet to avoid taxes. The decision requires careful consideration of your unique business and situation.

Need help deciding if this is the right move for you? I’m here to help. Schedule a call with me and find out how a financial planning partner can take your business to the next level.