How to pay yourself as a creator

Creator David Erick Ramos is an incredible ocarina player (you mean the flute instrument from Zelda? Exactly the one). But today David and financial manager Belva Anakawenze are talking numbers.

Business structures, retirement, emergency funds--there's no topic off the table in this open and honest conversation between David and Belva. If you're a creator, then you're bound to relate to the realities of running a creative business.

This video is intended as knowledge-sharing, not tax, financial, or legal advice. Always consult with tax/financial/legal professionals to determine what's best for your business.

Transcript:

David Erick Ramos:
Put your two thumbs down here.

Belva Anakawenze:
Okay.

David Erick Ramos:
Like this.

Belva Anakawenze:
Oh, like a flute.

David Erick Ramos:
Exactly.

Belva Anakawenze:
Okay.

David Erick Ramos:
And then just blow. You're amazing.

Belva Anakawenze:
It doesn't sound like it when you do it.

Hey everyone, welcome to The Earn Up. I am Belva Anakwenze, and I know you're used to seeing me here giving you financial tips and tricks, but today I have a very special guest. I have David Erick Ramos with us today. He is a musician and a specialist of the ocarina. He is a digital content creator, a composer, a teacher, a performer, and more. Hey, David.

David Erick Ramos:
Hi, thanks for having me.

Belva Anakawenze:
Of course. Okay, so I have to be honest. I have never heard of an ocarina. Can you please tell me what this is?

David Erick Ramos:
You're not alone. Most people don't know that this thing is real, but yes, I actually have one right here. So this ocarina, this instrument, dates back about 4000 years old, and they are ceramic flutes. I actually discovered through a popular video game series, if you know you know, but it's Zelda. I got my very first one when I was about 14 or 15 years old, fell in love with the sound, played all my favorite tunes, and then I started collecting them.

Belva Anakawenze:
Can you play something for me?

David Erick Ramos:
Oh, totally.

Belva Anakawenze:
I love it.

David Erick Ramos:
I actually brought an extra one if you want to try it.

Belva Anakawenze:
I would love to. Now, I played flute for one semester in junior high.

David Erick Ramos:
Oh, okay.

Belva Anakawenze:
I don't think that's gonna help me now, but let's see.

David Erick Ramos:
There's one hole for every finger, so there's eight holes on top, and then two holes on the bottom, like this. Imagine you're holding it like this, and then you turn it.

Belva Anakawenze:
Okay.

David Erick Ramos:
Exactly.

Belva Anakawenze:
That's gonna take a lot more practice. Now, tell me how you turned this into a business.

David Erick Ramos:
I saw the possibilities of this instrument, and I wanted to teach people, this is what the instrument is capable of, and this is what you personally can do with the ocarina, and that's been my mission ever since. One of the biggest struggles that I've faced so far is understanding how to pay myself. I have my business income, my business expenses, but also my personal expenses, and I'm just not sure that I'm separating the two correctly.

Belva Anakawenze:
My suggestions always have, they're layered, and they have a number of factors that go into how I answer the question. Are you comfortable sharing with me about what your profit would be in a year?

David Erick Ramos:
I usually make 40 to 45K.

Belva Anakawenze:
In profit?

David Erick Ramos:
No.

Belva Anakawenze:
Okay, yeah.

David Erick Ramos:
Yeah, after taxes, maybe it's around 12, 13K.

Belva Anakawenze:
Okay, yeah. Being a sole proprietor or an LLC is perfectly fine. And the way that works when you are a sole proprietor, or a single-member LLC, is that you just simply take draws from the company, and that's what you've been doing. As long as you have separated your business account from your personal bank account, and you're keeping everything separate, you're doing everything correctly. As long as you're saving for your taxes, paying estimated taxes, you are already on track.

David Erick Ramos:
Yeah, so I do have a sole proprietorship. But when is it an appropriate time to transition to the LLC?

Belva Anakawenze:
There's no tax difference at all between a sole proprietorship or an LLC. So, the only reason why you would do an LLC at any stage is really just to simply avoid liability. And that would be from a legal perspective, right? Now if we're talking about financial benefits, like tax benefits, you may wanna look at doing an LLC that's taxed like an S-corp, or becoming an S-Corp, or a corporation, right? And then once you get to those levels, then it makes a little bit more sense to do it, but then you're talking about profit, usually of about 150, for it to make sense.

David Erick Ramos:
So you just mentioned the S-Corp, and corporations. That's about as far as I go. Can you dive a little bit deeper into that? And what are other organizations that you could put together?

Belva Anakawenze:
So, I think the question we're talking about is how you pay yourself, right? The difference when you have an S-Corp is that you need to pay yourself a reasonable salary, and that means you're actually putting yourself on payroll, your company's acting like the employer, you're acting as the employee. So there's payroll taxes on both sides. Still can pull the same draws down, but in addition to the draws, you also are an employee. And the difference with a regular corporation is you don't take the draws at all. It all happens through a salary, or dividends that you pay out.

David Erick Ramos:
That sounds, in one way, very beneficial, but from what I'm understanding, that might be more trouble than it's worth.

Belva Anakawenze:
Again, everyone's situation is different. But 100%, there is huge tax savings, and there's fun things you can do in retirement when you have these different variations on how you pay yourself, through these different entities, but sometimes, to your point, it's more trouble than it's worth until you're really bringing in the money that substantiates the amount of work that goes into it. If you think about it, how you, what projects do you decide to take and not take, you sometimes won't take the lower paying gig because it's not worth your time.

David Erick Ramos:
Right.

Belva Anakawenze:
You have to think about that when it comes to your business structure. Is it worth your energy and time and money you're gonna spend to save a couple thousand dollars?

David Erick Ramos:
You just mentioned retirement. I feel like as a creator, and with other creators I've spoken to, that is such an afterthought when a lot of us are trying to make it month to month with what we make as creators. What are some tips you would have for saving for retirement?

Belva Anakawenze:
Include it in your monthly budget. No matter what, you have to plan for retirement. So that first thing is it should be part of your expenses, the same way you pay rent, your car loan, your insurance. You should be having retirement as a line out in your budget. The next thing is to start. Like, even if it's $25 a month, or whatever it is, you have to start putting money away, and know that that money is earmarked for your golden years, and it's not for today.

David Erick Ramos:
So I'm wondering if creators should think of it as paying themselves within certain brackets. So you have your personal salary, you have what goes towards your business, and then what you are putting aside for retirement, so it's percentages. Is that the easiest way to think about it?

Belva Anakawenze:
You have to realize that retirement accounts and how you fund retirement, there's usually thresholds, and those thresholds are annual limits you can put in every year. So sometimes it's not a percentage. It'd actually be like, if you can max out your 401K at $18,000 or $20,000, or whatever the limit is for the year, your goal could be that. If you know you can't afford that, then maybe your goal was $10,000, and maybe it is a percentage.

So there's no clear-cut way to do it. My suggestion is always try to do the maximum you can, while still being able to pay your bills, and you not eating cat food. Your cats can eat cat food, but you can't.

David Erick Ramos:
Right. So if we had to look at it as priorities, from what I'm understanding, put a roof over your head and make sure you have food on the table, but then when it comes to retirement, and investing in your business, is there a certain order that you would put those in?

Belva Anakawenze:
Yeah, I mean, for me, obviously, to your point, you need to eat, you need a place to sleep. But the next thing is always gonna be an emergency fund. I always say three to six months, and maybe even longer. So that means three to six months set aside of everything you would need to make sure the roof stays over your head, and that you can continue to eat and have a life, right? I mean, that doesn't mean go shopping, and all that other fun stuff, but enough to survive.

Then the next thing would be things like retirement, or long-term savings, long-term goals, et cetera. And honestly, the number one mistake most creators make is actually not thinking about retirement. We always live in this very fast-paced microwave age, where everything happens now, or thinking about today and not tomorrow. It's important that the first thing you do is just start thinking about it, and then start investing today.

David Erick Ramos:
So honestly, this is really relevant to me, because I have not personally started saving for retirement.

Belva Anakawenze:
I mean, the most important part is now you're getting the information, and that you're gonna start today, and even if it's $25 a month, you have to start today, because inflation, especially now, inflation is outpacing any money you have in savings. So your dollar that you had in the bank account two years ago is not worth the same dollar it is now, so you have to have your money invested in some form or fashion, so hopefully those gains will at least keep you up with or outpace inflation.

David Erick Ramos:
As opposed to having it in a shoebox under your bed.

Belva Anakawenze:
Under your mattress. Under your mattress does not work. Under your mattress works if you need to run real quick and you grab some cash.

David Erick Ramos:
Yeah.

Belva Anakawenze:
But it's not meant to be your retirement or your long-term savings. So why haven't you started investing or thinking about retirement?

David Erick Ramos:
Living as a creator, your income fluctuates a lot. And so I, at this point, am kind of living month to month. I do have debt, college debt, and I also have business expenses that now I have to consider, but thinking about everything that we've talked about, I think I can restructure some stuff to at least put aside $100 a month towards my retirement, and be okay.

Belva Anakawenze:
And don't forget the emergency fund, too. You have to do them both.

David Erick Ramos:
Yeah.

Belva Anakawenze:
But also remember you can also think about those extra gigs, those extra gigs that you get that you are not accounting on that are not part of your budget, you can set that aside, that money aside as well, and use that specifically for that.

David Erick Ramos:
Yes.

Belva Anakawenze:
David, thank you so much for joining us today. I really appreciate all of your questions and your thoughtfulness, so thank you.

David Erick Ramos:
It was my pleasure. Thank you.

Belva Anakawenze:
And thank you all for joining us on The Earn Up. And remember, as always, this video is for informational purposes only, so make sure you consult with legal and financial professionals to see what works best for you. Until next time, go be creative with your business.