Reduce your Taxes? Open an LLC!

So you’ve managed to build up your audience on OnlyFans selling your content. But don’t you have to pay taxes on all your profits?

Without proper tax planning, Solo OnlyFans Creators owe a lot of money to the IRS. This is because OnlyFans pays out creators as independent contractors. Although this makes it slightly easier to do your taxes, it means creators often massively overpay on their Federal and State taxes.

You don’t want to be an independent contractor: you want to be considered by the IRS as a business. This is why it’s critical to form an LLC as soon as your OnlyFans page starts to make money.

Disclaimer: This article is for informational purposes only and does not constitute tax, legal, or professional advice. Always consult with a qualified tax professional for advice specific to your situation.

The Benefits of Forming an LLC

The US Tax Code grants many tax cuts to people who own businesses. Luckily for you, OnlyFans is legal business just like any other, but you’ll have to jump through some hoops to officially set one up.

Many of the most powerful tax deductions depend on opening your own LLC for your OnlyFans business. An LLC is a separate legal identity for your business that anybody can open. Every state has their unique forms and requirements, but generally it involves paying a registration fee, filling some forms, and an annual report and maintenance fee.

There are tons of benefits of having your own LLC. You can manage your business finances separately in a company bank account, and take advantage of special tax savings that were unavailable to you as an independent contractor.

Reducing social security tax

What are some of these special tax savings associated with LLCs? The largest tax cut you’ll get involves the social security tax. If you create an LLC and elect to be taxed as an S Corp by the IRS, you could reduce your social security taxes by over 60%. Normally as an independent contractor, you owe a flat 15.3% social security tax on your entire OnlyFans income, no matter if you made $10,000 or $100,000 in a month.

By opening an LLC and paying yourself a salary, your social security tax is no longer calculated from the total income of your OnlyFans business. Instead, it would be levied on only the amount you pay yourself as salary. If you choose to pay yourself a salary of $120,000 a year, any income you make above that will not be taxed by social security. This structure could drop your 15.3% social security tax burden by around 60% or more, depending on your situation and tax bracket.

If your OnlyFans revenue is $100,000 per year, you could potentially save up to $9,180 on Social Security taxes alone by forming an LLC. The tax savings may be much greater for creators earning above $10,000 a month in revenue.

The process of setting up your LLC in order to reduce social security taxes may not be straightforward (like doing an S Corp election or filing state returns). You may have an easier time having a tax professional to set these structures up for you. It’s worth setting up right when using this strategy: the IRS can be very aggressive about mistakes involving social security tax. You’ll need to fill in specific forms correctly and pay yourself payroll properly, or the IRS could come after you and force you to pay the full 15.3% social security tax rate.

The Solo 401k

There’s a second major strategy to reducing your taxes if you own an LLC: the Solo 401k. Have you ever considered putting away some money for retirement, or investing your money tax-free in real estate, stocks, or ETFs?

The Solo 401k is a tax-advantaged investing account that you can open if you have your own LLC, and all your contributions to it are tax-free. In 2024, you’ll be able to put away up to $69,000 every year into the Solo 401k, reducing your taxable income by that same amount.

You can choose to invest that income in whatever you see fit, including stocks, bonds, or even crypto. You can even buy and invest in property with funds in your Solo 401k. It works similarly to any employee’s 401k, where you can grow your holdings tax-free until you reach retirement age.

Even if you’re not a big fan of saving for retirement, a Solo 401k is still a very powerful tool to reduce your taxes, and there are ways to withdraw the money from your retirement accounts without a penalty. For example, you can use a Roth IRA conversion strategy, where you can withdraw money from your Solo 401k penalty free every 5 years.

Pitfalls of Being an Independent Contractor

Creating an LLC won’t just help you save on taxes: it’ll help you from making big mistakes while filing as an independent contractor. Many independent contractors use their own personal bank accounts, making it very difficult to separate business expenses from personal expenses.

Mixing personal and business funds makes it more difficult to track your business expenses, claim tax deductions, and prepare accurate financial statements. The IRS may scrutinize your financial records closely, and any errors could result in hefty fines, penalties, or even legal action. An LLC forces you to use a separate business bank account. This helps separate your personal life from your professional life.

Reduce Taxable Income by Hiring Family Members

Another strategic way to reduce your taxable income as an OnlyFans creator with an LLC is by hiring family members. When you hire family members, their salaries become a business expense, reducing your LLC’s taxable income. Here are some key points to consider:

• Hiring your children: If you hire your children under 18, their wages are not subject to Social Security and Medicare taxes. Additionally, the first $14,600 (as of 2024) of their income is tax-free due to the standard deduction.
• Employing your spouse: By hiring your spouse, you can potentially qualify for additional benefits like health insurance deductions. Their salary is also a deductible business expense.
• Hiring parents: If you hire your parents and provide over half their support, you might be able to claim them as dependents, leading to additional tax benefits.

These arrangements must be legitimate: the family members should perform actual work for your business, and their compensation should be reasonable for the tasks they’re performing. Keep detailed records of hours worked and tasks completed to support the legitimacy of these arrangements in case of an IRS audit.

Conclusion: Open Your LLC as Soon as Possible

If there’s any one takeaway from this guide, it’s that you need to open your LLC as soon as possible. Most of the best tax benefits in the USA are only eligible for business owners, not independent contractors. If you decide to get professional help, a tax professional can always help you out with your taxes later on in the year, but only if you properly opened you LLC for as long as you were making money.