How Good Tax Prep This Year Can Save You Time, Money, And Heartache Next Year
It’s that time of year again. The annual humiliation. Taking financial stock of the past 52 weeks in a feeble attempt to hold onto as much of my hard-earned cash as humanly possible. The accountant might as well be dressed as the Grim Reaper. The list of things I wish I was doing, rather than getting ready for the tax man, is long enough to make Santa’s look like a grocery list.
Hopefully, you had a successful year. Business is not only steady, but growing. You’re organized and keep good records. Unfortunately, the artist in many of us often takes the lead. That can be a good thing for your photography, but not so much when it comes to paying the piper. While it may be too late to improve your tax position for 2013, there are things you can do to help make sure that you’re much better off a year from now.
Time for a quick disclaimer. I am not an accountant, tax professional, or financial advisor. While my previous life as an attorney has me hard-wired for details, the advice offered here is based solely on my own experiences– and mistakes– along the way as a working photographer in the United States. While many principles are universal, the formalities and actual paperwork will change somewhat from place to place. For more complete answers and advice, you should absolutely consult with an accountant or financial advisor where you live.
Structure Your Business
This has to be one of the first things you address when you embark on a career as anything, I’ll put it in terms relative to photography. The majority of photographers who go into business for themselves are considered to be sole proprietors. Since there is no formal incorporation, the photographer files a Schedule C along with their personal tax return to account for any business income earned in the previous year.
As your business grows, however, a formal approach may be in order. Forming your photography business an a Limited Liability Company (LLC) adds a divider of protection between your business assets and your personal assets. For example, assume that you are sued by a disgruntled client. As a sole proprietor, your personal assets would be fair game if your business assets were not sufficient to cover the loss. Once you are incorporated, however, your personal assets would be insulated from any liability assigned to you as a business entity.
As your business continues growing, filing for S-Corp status not only retains the protection afforded to corporate status, but also provides additional tax savings at the end of the year.
Separate Bank Accounts
No more robbing Peter to pay Paul. Part of taking your business seriously means that business money goes into one account and personal money goes into a second. Yes, you are the business owner, but to a certain extent you are also an employee. Even if you end up writing a check to yourself from your business account, you will have a much easier time explaining your income to your accountant– and possibly the IRS– if you can show a clear separation between business and personal.
Insurance — Property & Liability
There is (almost) no worse feeling than having broken, lost, or stolen gear that you know you can’t afford to replace. While insuring your equipment is (or should be) a no-brainer, many photographers either forget or ignore the idea of liability insurance. Consider two scenarios. In the first, you are shooting a family photo session in your studio. One of your light stands tips over, hitting one of the family members and injuring them. In the second, you’ve done everything you can to make Bridezilla happy, but she sues you anyway, alleging that you missed several important shots, didn’t deliver the album in a timely manner, got drunk at the reception– whatever. Liability insurance helps get you through these scenarios without bankrupting you. Package Choice and Pro Photographers Insurance are two companies that offer extensive insurance options for professional photographers.
This is one of those questions where ten photographers will give you ten different answers, and each one of them will swear that they’re right. I urge you to find the answer locally from someone who truly does know what they’re talking about.
The traditional view has been that you need to charge sales tax on products only. That meant that you definitely added sales tax to prints, but not necessarily to the session fee. All but five states now require sales tax on photography-related products, but more and more are also starting to require sales tax on session fees as well. Know where you are and what is expected of you.
Most people who collect a regular paycheck have an employer who makes regular payments to the IRS on their behalf. People who work for themselves, however, are usually required to pay estimated quarterly taxes. A tax professional can be extremely helpful in this regard, making sure you know what you have to pay and when you have to pay it.
Home Office Deductions
I can’t tell you how may people go down the rabbit hole on this one. The idea of saving on overhead by working from home is a sound one, but the decision of whether to claim the money spent on that space as a deduction on your taxes has to be very carefully considered. This is one of the most highly abused deductions in the entire Tax Code. In order to weed out those who take it seriously, tax rules require that the space in question be dedicated 100% to business use. For me, this would be impossible. I use my office at home for too many non-business-related things. Legitimately claiming this deduction means that when you “leave work” at the end of the day, your office is off-limits for internet cat videos.
Don’t Forget Your Second Shooters
The main question here is going to be whether they are considered employees or independent contractors. If they are employees, you will have to take out appropriate taxes and file a W2. If they are independent contractors, however, filing a 1099 requires them to handle their own tax concerns. Classifying them as independent contracts makes your life much easier. My written contract for second shooters clearly states that they are independent contractors.
Save Receipts & Keep Good Records
Being an artist is awesome. Flexing your creativity day in and day out can be incredibly rewarding. But being a business owner brings with it huge responsibilities– especially if you have employees and a family to support. The devil is in the details and so is the tax man. You have to be prepared to back up your numbers. Most places now allow for digitized receipts. Use an app like DocScan to scan receipts directly into your phone, then upload them to Dropbox or Google Docs to save and categorize.
Plan for Retirement
I know it’s tough to think about now. You’re young, vibrant, and healthy. Retirement isn’t anywhere remotely close to showing up on your radar. Yet. Setting up a SEP-IRA, however, is a great option for self-employed business owners to set aside money for retirement and avoid a considerable amount of tax liability at the end of the year. This is definitely one of those areas for seeking professional help.
Still with me? Feeling the room spinning a bit? I know it’s a lot to digest. I’ll give you a few days to wrap your head around it. Meet me back here on Friday for Part 2. — Things you can do every day to help.
If you are still insisting on navigating this legal and financial mine field yourself– something I strongly discourage– take a look at “Julian Block’s Easy Tax Guide for Writers, Photographers, and Other Freelancers.”
PLEASE NOTE: This article is intended for informational and reference purposes only, and contains no express or implied warranties. As noted, neither the author nor DIY Photography are accountants, financial advisors, or tax professionals. We strongly urge you to consult with a professional in your area for any necessary legal, financial, and tax advice..
Jeff Guyer is a commercial/portrait photographer based in Atlanta, GA. Still an avid street photographer and film shooter, Jeff also launched a kids photography class three years ago, where rumor has it he learns more from the kids than they learn from him. Connect with him on Facebook and Twitter, or check out his work at Guyer Photography.