Maximizing Tax Savings for Performers: S-Corp vs Sole proprietorship in NYC

Recently, I had a conversation with a client who performs in New York City and internationally. This discussion raised an important consideration for artists and performers who work across multiple jurisdictions: the potential tax advantages of making an S-Corporation (S-Corp) election.

Understanding the NYC Tax Landscape

A previous accountant had advised my client against forming an S-Corp due to New York City's 8.85% General Corporation Tax (GCT). While it’s true that NYC does not recognize the federal S-Corporation election and treats S-Corps similarly to traditional C-Corporations, there’s more nuance to consider when income is primarily earned outside of the city.

NYC’s GCT only applies to corporations that do business, employ capital, or maintain an office within the city. For an S-Corp, this tax is limited to income generated from activities conducted within NYC. If the corporation does not meet these criteria, the GCT may not apply to its earnings at all. For performers who work in various states and countries, this can open up significant opportunities for tax savings.

The Power of S-Corporations

One of the biggest advantages of electing to form an S-Corporation is its potential to reduce self-employment taxes. For self-employed performers, income from multiple jurisdictions can result in hefty self-employment tax bills, which can be mitigated by the S-Corp structure.

Here’s why:

1. Self-Employment Tax Savings: Without an S-Corp, performers must report all their earnings as self-employment income, which is subject to a 15.3% tax rate (covering Social Security and Medicare). By setting up an S-Corp, performers can split their earnings into two categories: salary and distributions. Salary is subject to self-employment taxes, but distributions are not. This strategy can significantly lower the amount of income subject to self-employment taxes. For my client, the savings could reach an estimated $25,000 annually.
2. Limited NYC Tax Exposure: Since my client primarily performs outside NYC, a large portion of his income falls outside the scope of the GCT. Income generated in other states or countries isn’t subject to NYC’s corporate tax, allowing for additional tax savings. Although he may still owe taxes in the states or countries where he performs, the exclusion of non-NYC income from NYC taxation is a major advantage.
3. UBIT vs. GCT: While UBIT may seem more attractive due to its lower rate (4% compared to 8.85% for GCT), it's essential to recognize the full scope of savings available through an S-Corp structure. The potential to exclude non-NYC income from GCT and save on self-employment taxes often outweighs the UBIT’s simplicity for high-earning performers. Sole proprietors, although benefiting from lower UBIT, face higher self-employment taxes on all earnings. For clients earning significantly outside NYC, the savings from the S-Corp structure, even with GCT applied to city-sourced income, can be substantial.

Maximizing Out-of-State and Foreign Income Benefits

Given that my client performs internationally and across the U.S., understanding how to classify and tax his income is critical. Here’s how the S-Corp election plays into his strategy:

• Out-of-State Earnings: Income earned in other states or countries is exempt from NYC’s General Corporation Tax. While this income will still be taxed by the relevant jurisdictions, avoiding the NYC tax means my client retains more of his earnings.
• Reducing Self-Employment Tax Liability: With the S-Corp, only the portion of income classified as salary is subject to self-employment taxes, while distributions remain untaxed for Social Security and Medicare purposes. This can be a game-changer for high-earning performers.
• Filing in Multiple Jurisdictions: It's essential to note that although my client’s S-Corp will reduce NYC and federal tax burdens, he will still need to file state income tax returns where he performs and comply with foreign tax laws if earning income abroad. Proper withholding is crucial to avoid penalties.

Additional Considerations for an S-Corp Election

While the potential tax savings are significant, there are other factors to weigh when considering an S-Corp election:

1. Reasonable Compensation: The IRS requires that business owners pay themselves a “reasonable” salary. Performers will need to determine a fair wage for their services while balancing distributions to optimize tax savings.
2. Increased Administrative Responsibilities: Running an S-Corp comes with additional administrative duties, including payroll, separate tax filings, and bookkeeping. However, these can be managed with the help of a qualified accountant and are often outweighed by the potential tax savings.
3. State-Specific Tax Rules: Some states, like California, impose a minimum tax or franchise tax on S-Corps, regardless of profitability. Performers should be aware of these rules to accurately project tax savings.

Conclusion: A Smart Move for Performers

For artists and performers who work across different locations, setting up an S-Corporation can be a smart financial move. By leveraging the S-Corp structure, performers may significantly reduce self-employment taxes and mitigate NYC’s General Corporation Tax for income earned outside of the city.

My client’s case highlights the importance of tailoring financial strategies to individual circumstances, especially for those earning in multiple jurisdictions. Whether you’re a performer, artist, or freelancer, the benefits of an S-Corp election could be substantial.

Schedule an Appointment

If you’re interested in exploring whether an S-Corporation election could work for your unique situation, don’t hesitate to schedule an appointment. Contact Stella Sanchez, CPA for more information. Let’s work together to create a tax strategy that maximizes your income while minimizing your tax burden.