Making money as an artist or creator is difficult at best. The internet allows artists to find their perfect audience but it also floods and saturates the market. This makes it incredibly difficult to stand out and earn a living from creative endeavors. Despite these complications, the reality remains: every art form has an audience. Patreon allows this audience to find and support the art and artists they love. If you are a Patreon creator and earning income from the platform, you may be wondering if you need to register your business as a Limited Liability Company (LLC) or if you can file as a Sole Proprietorship, for tax purposes. While it is not necessary to register as an LLC for Patreon earnings, there are many reasons why you might consider doing so. To help you determine the best path forward for your business, we’ve laid out some of the options available to you and the tax implications for each.
How Patreon Works
Patreon is a platform that allows fans to act as “patrons” who pay creators for access to their work. Creators set up pages for subscriptions by establishing perks and exclusive access in exchange for financial support. Creators get to choose how this support looks by setting different subscription tiers. An artist might choose to set up a base level tier at $1/month with limited access, a $3/month tier with access to some exclusive content, and a $5/month tier that offers access to all the benefits of the $3 tier plus even more exclusive content like patron contests and live chats with the artist. Depending on the type of content being created, the creator may instead set up an account based on per project payments rather than monthly subscriptions. These different options allow creators to earn money in a way that makes the most sense for their craft. For example, many video game developers use Patreon to support their ongoing work. By using a per project payment system, these developers do not have to deal with the pressure to produce content on a regular basis.
Patreon, LLCs, and Tax Options
If you are a creator using Patreon, there are a few options available to you when it comes to filing your taxes.
Sole Proprietorship
Most people using Patreon will file their taxes as a sole proprietorship. As a sole proprietor, you will report your income on Schedule C of your Form 1040. If you file in this way, all of the income you record will be subject to both federal income taxes and self-employment taxes. The self-employment tax rate is 15.3% comprising 12.4% for Social Security Tax and 2.9% for Medicare Tax up to the first $137,000 of net income. If your income is greater than $200,000 an additional 0.9% Medicare Tax may apply. This tax rate may seem high if you are used to paying payroll taxes or FICA when working for someone else. The reason for this is simple. As an employee, you and your employer share the cost, paying 7.65% each. As a sole proprietor, you are covering the full expense yourself. You can assume this designation without having to do much of anything. You are not required to file paperwork or register with the state where you operate. This is the “easiest” business classification but not necessarily the most cost-effective.
Limited Liability Company (LLC)
Your Patreon income does not require you to register as an LLC but there are many reasons you should consider it. Setting up an LLC can protect your personal assets from the majority of liabilities incurred by your business. Should your business face a lawsuit or run into financial difficulties, your assets will not be at risk.When it comes to your taxes, an LLC provides you with more flexibility. You can file as a sole proprietorship or, if you qualify, you can file as an S Corporation. If you are generating significant income from your patrons, it is a good idea to form an S Corp to save some money at tax time. An S Corp designation will allow you to avoid self-employment taxes. Instead of paying the full 15.3%, you will pay yourself a reasonable salary, which will be subject to the 7.65% that an employee would cover, and anything earned beyond your salary is treated as business income. If you choose to register your business as an LLC, you will be responsible for paying state-specific fees and filing the appropriate paperwork. You will submit initial documents and pay an initial fee, and once accepted pay an annual (or bi-annual) fee and submit an annual report. No matter how much or how little you earn, it is likely that Patreon will send you a 1099 or some other tax reporting form. This form will contain your full earnings and will match the amount that they report to the IRS as being your income. If you do not get one of these documents from Patreon, you are still legally required to report your income so it is important to keep careful records and track your earnings.
Gift or Donation?
For many Patreon users, the nature of their earnings can be confusing. Patrons are voluntarily giving their money so is it a donation or a gift?Gifts are not considered taxable income. Gift givers have to pay a Gift Tax if the value of the gifts amounts to more than $15,000. But the receiver does not have to pay taxes on this amount as it is considered a gift, and not income. The income you receive through Patreon is considered a donation, which, for all intents and purposes, is considered income and subject to all appropriate taxes. Remember, your fans and patrons may feel like they are giving you a gift but you are supplying access to your work in return for that money, making it a donation.
How to Set Up an LLC
If you decide to register as an LLC, the good news is that it’s not very hard to do! Choose a business name, run it through a search tool to check availability, and put together the required documentation and fees. If you are not sure what your state requires or don’t really have a head for paperwork, you can hire a registered agent service to take care of it for you. A registered agent can fill out, file, and receive business documents on behalf of your business, therefore making sure that nothing important is missed. When registering your business for an LLC, be prepared to provide the following information:
- Business name
- State in which the business will operate and the LLC documents filed
- A business email address
- Business address
- Business phone number
If you want to register in a state where you are not located, you will need to hire a registered agent who operates during normal business hours in the state where you intend the business to be registered. Again, this agent can receive and file the appropriate paperwork on your behalf so they need to fit certain state requirements. Next, create an LLC Operating Agreement and fill out the state’s Articles of Organization form. Once the paperwork is submitted you can obtain an Employer Identification Number (EIN) that will be used by the IRS to identify your business. After this, fees are due and you are set.While this all sounds complicated, it is not. You can continue to file your Patreon earnings as a sole proprietorship or you can protect your personal assets by taking the steps above to register as an LLC. If you would like more information on the process, visit our step by step guide or speak to a tax specialist or registered agent today!
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