Question via email from Lee G:

Greetings Scott,

Here’s a question that you can add to the pile.

I’ve always wondered how screenwriters do their books, and by “creative bookkeeping” I do mean legal ways to avoid paying too much tax.

I realize that it will be different depending on the country of residence, but the general principles should be similar.

Usual caveat: I’m not an accountant, I don’t play one on TV, I got a B- in Algebra II, and if it weren’t for Quicken, I’d be one sorry-ass numbers-cruncher.

That said…

I, like most working screenwriters I know, incorporated, what is typically referred to as a “loan-out” corporation. That means is when you sell a project or get hired for a writing assignment, the studio deals directly with your corporation which loans out your writing services per the terms of the deal your reps negotiate for you.

There are two primary advantages for having a loan-out corporation:

* You can run all your writing expenses through your corporation so that you don’t have to deduct them on your personal income tax forms. This is not only a legitimate reflection of your business practice (one of the first things you need to do when you break in as a screenwriter is get a credit card to use exclusively on business expenses), it also – in theory – is supposed to give you additional protection to avoid audits (i.e., lots of deductions on personal side for biz expenses can be a red flag to IRS).

* You can create a pension plan into which you can up sock away upward to $30K per year (that’s a 20o2 figure, so the limit has likely gone up). That’s a great way to reduce your net personal earnings and augment whatever other retirement savings plans you have.

The downsides:

* It’s a lot of paperwork, which for most writers means they pay additional money to an accountant and/or business manager to handle it.

* You may end up paying social security twice: When you receive salary payment from the corporation (the corp’s FICA payment) and then when you pay taxes personally.

I have no clue about other countries, nor about states outside of California.

For more information, John August posted on the subject here and it looks like there are some helpful comments from lawyers, accountants, and biz managers as well.

I also found this which may be dated, but the concepts are probably still viable.