If you’ve been circling the web3 corner of Twitter, it’s probably not a matter of “if” you decide to start working in the space, but “when.” Joining the vanguard of this nascent space requires rethinking a lot of old models of how we work. There’s a lot of excitement around a variety of experiments for new working models, but you still need to interface with the stagnant legacy world of laws and taxes.
Working in web3 has two aspects: finding work and staying compliant.
There are many resources and different avenues to explore for work in web3, such as bounty boards, grant programs, career sites, and posting on Twitter.
Finding work is the easy part, staying compliant is a bit trickier. How you organize yourself and your work can potentially save you a lot of money and headaches when it comes time to pay your taxes. It can also protect you legally if anything should ever go wrong.
To empower more people to cross the chasm and work in web3 in a compliant way, this article explores two options to protect yourself: forming an LLC or choosing an S-corp.
Keep in mind that nothing in this article constitutes financial advice or legal advice. This is written in the spirit of helping you kickstart your research process and ultimately choose what’s best for you. Additionally, this article is focused on a US-based audience. We will have future articles that are tailored towards other jurisdictions.
In any case, speaking to an accountant and a lawyer is a best practice.
The first step for anyone starting to work in web3 is to create a work wallet, separate from your personal one. Your work wallet should be solely used to accept payments for bounties, grants, and invoices, as well as to make business expenses. The logic for doing so is the same as a bank account since you want to separate your business and personal finances. This will make your accounting a lot easier. This is also necessary to maintain the “corporate veil” -- the legal difference between you, the person, and you, the business.
Both Metamask and Rainbow make this really easy. In both platforms, it’s a matter of creating a new account/wallet within the application. You can continue to use your existing wallet for trading, buying NFTs, supporting artists, and participating in DAOs. But your second, work wallet should be exclusively used for accepting payments, making legitimate business expenses, and paying yourself.
Once you have a second wallet, you can make getting paid easier with the Ethereum Name Service (ENS). Why do this? An address like yourname.eth is way more human readable than an address like 0x1934e252f840aa98dfce2b6205b3e45c41aef830.
You have two options here:
Setting up an ENS domain that is pointed at a separate work-focused wallet is a good step whether you end up choosing to incorporate as an LLC or choosing an S-Corp.
You have two paths before you as a freelancer or bounty hunter working in web3.
The first, incorporating as a single-member LLC, provides you with liability protection, tax advantages, and is quick and easy to set up.
The second, electing to file as an S-corp, comes with more tax advantages and flexibility but with some additional complexity.
This option is generally considered the easiest and cheapest to set up and get started. An LLC is a business structure which relieves the owner of personal responsibility for the company’s debts or liabilities, since the business is established as its own legal entity.
The process is straightforward and you can form an LLC using an online platform like Stripe Atlas or Legal Zoom. The former is more expensive, but comes with a lot of perks; the later is quick and easy but will only establish your LLC.
After your LLC is incorporated, you need to create a bank account owned and operated solely by your business. Options like Mercury and Found are easy to use platforms for freelancers and solopreneurs.
You also need to register with a crypto exchange to off-ramp your tokens from your wallet, as described above, to your business bank account. Some options of exchanges are Binance (US only) and Coinbase. You should consider using one exchange for personal trading and a separate exchange for the sole purpose of off-ramping payments from your business wallet to your business bank account.
The LLC would subsequently make a distribution: transfer the funds from your business bank account to your personal bank account.
An S-corp is not a formal business structure but rather a tax classification, and an LLC can choose to be taxed as an S-corp. Within an LLC structure, the owner is not an employee and therefore can only be paid via distributions (direct bank transfers). However with an S-corp, the owner can be an employee and choose to be paid both a salary and distribution.
The resulting tax advantages is that when an S-corp makes a distribution to its owner, that distribution is only subject to income tax. Therefore, by limiting the salary to a reasonable amount, the rest of the income paid in the form of distributions is only subject to income tax. Given the added cost of maintaining an S-corp, this structure is generally worth it if you are making significant distributions.
It is important to bear in mind that the IRS could raise questions if salary is not deemed reasonable, and understated on purpose to save on taxes. You can gather estimates from Robert Half, Glassdor or Payscale.
The tooling infrastructure for S-corps is also more mature and so you’re able to receive benefits like healthcare, dental, vision, retirement and so forth.
To receive benefits, we’ve partnered with Opolis, a Web3 employment cooperative, whereby a freelancer would get the same benefits as being an employee. You can sign up with Opolis here. Signing up for Opolis will help you with all of the following benefits:
Similar to an LLC, you would use an exchange to off-ramp your tokens to your business bank account. With access granted to Collective to manage the business bank account, all your paychecks will then be handled by Collective, and received directly to your personal bank account.
Whether you are managing your bookkeeping by yourself or hiring a Certified Professional Accountant (CPA), having the appropriate tech stack at your disposal will facilitate your accounting. Tracking and extracting onchain data for accounting is a tedious task, and Cryptio allows you to convert the blockchain transactions from wallets, exchanges, and custodians into your accounting software. Cryptio integrates with Xero and Quickbooks, such that transactions can be labeled and synced as journal entries.
Request Finance allows you to generate your crypto invoices, and you can issue invoices in the currency your client prefers (e.g. USD) and get paid in any crypto you would like (e.g. ETH).
It depends a lot on your unique circumstances, which is why we recommend speaking to an accountant.
Forming a single-member LLC (the first path) is a great option because it’s quick and easy. Your overhead will be relatively minimal, but you’ll be protected from liability. There are also some ways you can use this path to reduce your overall tax burden. Some accountants will recommend this option in particular if you are only working part-time (i.e. less than 20 hours a week) or infrequently (i.e. not all year-round). It can also make sense if you’re expecting to earn less than $50,000 in a year, though some accountants will still recommend it for higher amounts.
The second path, filing as an S-corp, is great because it gives you all the advantages of a stable, full-time role, like regular paychecks and benefits, while still allowing you the flexibility and freedom that comes from working independently. It’s a little more complex to set up and maintain, which is why many accountants will recommend waiting until you’re expecting to earn over $100,000 in a year. Also, Collective and Opolis take care of most of that complexity for you and you can write off the fees you pay for them to do so.
Ultimately the decision is yours and should be based on the variety of factors we’ve discussed here: protection, complexity, tax savings, and benefits. Working in web3 can transform your career, be financially rewarding, and surround you with a vibrant community. Investing the time to be compliant on your tax and accounting obligations from the get-go will let you be in the game for the long haul.
Header image by @0xNeight
Cabin is a decentralized city built by creators, for creators. Cabin believes in the power of bringing people together IRL, especially for decentralized and distributed teams. We are the DAO to help other DAOs accelerate their work by getting together IRL.
Our mission is to build a decentralized city with nodes all over the world, empower creators to pursue an independent career online, and build the products for creators and DAOs to achieve the first two goals. Our decentralized city is made up of various nodes around the world, starting with Node 0 outside of Austin, Texas.
For more information, please visit https://www.creatorcabins.com/
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