The deadline for filing your federal income taxes in the US is coming up soon! This year we get a couple extra days and don’t have to get the paperwork in until April 18th. But if you haven’t already handled, now’s the time to get organized and make sure you’re clear on what you can and can’t claim as deductions, what forms you need to fill out, and approximately how much money you’ll owe.
I do recommend that you get a financial professional to look over things with you, especially if you’ve got a complicated situation or it’s your first time filing as a business. And remember, I’m no tax professional. This is business owner to business owner advice and common knowledge information, not advice on your particular tax situation. You are responsible for double-checking everything you submit to the IRS and that you do submit all the forms required of you.
I will only be talking to sole proprietorships in the United States here, primarily because I know nothing about other countries’ tax laws and if you have a different business structure than a sole proprietorship (in most states, you are automatically considered a sole proprietorship if you haven’t created a corporation or partnership) you’ve probably already been at this rodeo before and should contact a pro if you haven’t.
Now that we’ve got that out of the way.
INTRO TO TAXES AS AN ARTIST
There are rules for whether you can file income from your art as a hobby or you must file it as business income. (By income, I actually mean “net profit” which is all the money that came in, minus your expenses.) The primarily rule is that if you’re trying to make a profit from it, it’s not a hobby. So if you’ve got an online shop and you’re reading this article, it’s probably not a hobby.
If it’s a hobby, none of this applies to you. Move along and file your personal taxes as you normally would.
While it’s a little late to make your 2015 tax return easy, you can still make things simple for next year’s tax return if you:
➡ get a bank account and credit or debit card you use only for business
➡ run all income and expenses related to your art through that account
➡ connect that bank account (and any ecommerce platforms you use) to some accounting software (I like Wave which is free unless you need to do Payroll and stuff like that)
Every week, Wave sends me an email reminder to login to my account and categorize my transactions. It only takes about 5 minutes each week and when I go to do my taxes, everything is right there at my fingertips – no calculator or shoebox of receipts needed! You can thank me later.
BEFORE TAX SEASON
Another thing you should be doing all the time is setting aside money to pay your taxes. A good rule of thumb is to keep 25% of your income. You probably won’t have to pay all of it to the IRS, but it’s very unlikely you’ll have to pay more than that so you can be sure you have enough money come April.
I know some artists who like to tie their business bank account to a savings account where they set aside a quarter of their income each month for tax purposes. Then after they pay taxes, whatever is left over is a nice bonus they can transfer into their personal account! Yay!
However, you may be required to pay Quarterly Estimated Taxes, which are approximate tax payments you pay along the way instead of in a lump sum in April. Use this form to figure out if you need to pay quarterly taxes, which is primarily dependent on whether you anticipate paying more than $1,000 in taxes for the year.
You can pay your Quarterly Estimated Taxes on form 1040-ES or just file it online using EFTPS. I love this Etsy article for a little more detail on paying quarterly taxes.
WHAT CAN YOU CLAIM
A lot of people ask what counts as a business expense that you can use as a deduction on your taxes. Honestly, using your common sense is your best bet here if you aren’t going to hire a CPA to tell you yes/no on everything. The question to ask yourself is, “Did I buy this strictly for business use?”
If you did, easy. It’s a deduction. (Unless it’s a much more extravagant purchase than the circumstances required.) If you didn’t, then things get more complicated. Most tax pros would probably tell you to calculate what percentage of the purchase was used just for business and then use that percentage of the price you paid as the expense.
For a lot of people, something like a home studio would fall into this category. If you use the room as your studio but also storage for your Christmas decorations (just me?) or you’ve got a guest bed in there, then you’re going to have to calculate what percentage (like square footage) of the room (or really, of your whole home) is solely used for your art business and then use that percentage to find out what portion of your rent or mortgage, your electricity, etc is used for your art business.
An example may be helpful for those of you who hate numbers:
If my home is 5,000 sq. ft. and I use 100 sq. ft. of it for my business (silly numbers just to show you the math, of course) then 2% of your home is used for business. If you pay the electric company $500 a month, then 2% of that is $10, which is how much you can claim as a business expense for electricity.
You can do the same formula with anything that you pay for across your house and want to deduct. And you can do a similar formula for something like the gas in your car:
If you spent $1,000 on gas this year, traveling 500 miles the whole year (those numbers are ridiculous, I know) and you calculate that you traveled 30 miles to and from the local gallery you exhibit at and to and from your favorite art supply store then…
30 out of 500 = 6% and 6% of $1,000 = $60
You can claim $60 as a business expense for gas this year.
Common Deductions for Artists
It’s pretty common to deduct your transportation costs for art-related excursions, your hotel and meals for art fairs or similar events that require an overnight stay, website fees, the cost of new equipment or art supplies, your home studio, legal fees, agent fees, costs of exhibiting in a gallery, commissions to the gallery, membership fees, classes/lessons, marketing and promotion costs – and, little known fact, you can actually deduct your taxes – but only the amount you paid for your business dealings. If you need more detailed info about these sorts of expenses, I recommend you read this article that explains most of them in a more technical light.
Trades, Exchanges, and Payments in Kind
If you trade your art for a something for your business (ie you pay for a business expense with your art instead of money), you can’t deduct the whole price of the art. You can only deduct your out-of-pocket costs like the materials and shipping.
If You Teach Art
If you make more money from teaching art than you do from selling your own art, read this article about a big 2014 tax ruling that classifies art teachers who also sell art as still being professional artists (not hobby artists).
If you buy something big that will last more than a year (like a new easel), you have the option of deducting the cost bit by bit over a few years. That’s called depreciation. Big art tools, computers, printers, and art books are some commonly depreciated items. But I think it works better to do it all at once because you get a big deduction in one year instead of lots of tiny deductions over several years.
Cost of Goods Sold
COGS, for short, are a little complicated. The idea is that if you sell products (your art), you have to put a value on your “inventory” (the products you have in stock) at the beginning and end of each year.
So what costs you can directly attribute to the production of your art are called COGS: things like the cost of your materials – paint, canvases, etc. – can be considered COGS. And sometimes you can consider your overhead – electricity, water, etc – can be considered COGS too.
Some costs have to be categorized as capital instead of normal business deductions, which just means they are assets. The most common ones are your start up costs.
You have to be careful because anything included in your COGS shouldn’t be also included in your regular expenses.
DURING TAX SEASON
You’ll most likely be filing form 1040 for your personal income and a Schedule C form for your business.
Please pay and file on time. Otherwise, you are likely to get hit with hefty fees. And please don’t try to game the system. Log all your income and put an accurate number on your tax forms so you don’t end up in trouble. It’s pretty scary to get in trouble with the IRS and could be financially devastating.
If you’ve been tracking along, it should be pretty easy to go into your software (or spreadsheet if you’re old school) and look up your income and expenses and input those numbers on your tax return.
What forms do I file?
1040: If you are a sole proprietorship, you’ll file a 1040 like you normally would as your individual income tax return – but make sure to report your business income on this form as well.
Schedule C: In order to report your business income properly on your 1040, the IRS wants you to first fill out a Schedule C. If you only have one sole proprietorship, aren’t reporting more than $5,000 in expenses, made a profit, didn’t keep inventory in 2015, have no employees, and are not claiming your home office as an expense… then you can file a simpler version, Schedule C-EZ.
Schedule SE: Most artists have to pay a self-employment tax, which is filed with this form. This may mean more taxes, but at least your Social Security tax is capped at a certain point.
1099: If you paid anyone that wasn’t an employee of yours more than $600 for services, rent, prizes or awards, or royalties (1099-MISC); you paid more than $600 interest on a business debt (1099-INT); or you made direct sales of at least $5,000 of consumer products for resale anywhere other than a permanent retail establishment (1099-MISC), you need to file this form. There are other reasons to file that don’t usually apply to artists so if you have a unique situation, check with a tax pro.
940, 941, 943, 944, W-2, W-3: If you have employees, you probably need to file these forms.
Schedule A: If you want to pick between itemized deductions or a standard deduction, this form will help.
AFTER TAX SEASON
Please keep a record of your tax return. You don’t want this coming back to haunt you when it can be so easy to keep a copy. If you’re filing by paper, just print a second blank copy and write the info on both copies as you go along. If you’re filing on the internet, you can almost always download a pdf of your tax return, easy peasy.
STATE INCOME TAX
If you have a tax pro helping you file or you use an online tool like TurboTax, filing your state taxes will be a snap. If not, every state is different so you will need to do some quick Googling to be certain what’s required of you.
So this is a totally different type of tax, but I wanted to mention it because I think taxes confuse a lot of artists. In the US, you are required to pay a small tax to your state (and sometimes your city too) for every product you sell. But you’re not really out this money – the customer is.
If you charge $500 for a painting, and your sales tax is 10%, your customer is going to pay you $550. That extra $50 isn’t yours, though. You’re just keeping it safe for the state government and then giving it to them either monthly or quarterly, depending on your state.
If you haven’t set yourself up to collect and remit sales tax, do it ASAP. And don’t forget that the laws are funny for online sales – in most states, you probably won’t have to collect sales tax from customers who don’t live in your state.
Feeling better? I know there’s a lot that goes into filing your taxes, but if you use accounting software throughout the year and then use an online tax filing tool (I use TurboTax, for instance) you’ll be surprised at how simple it can feel. If you are unsure about anything in this article or have any questions about taxes that I didn’t cover, I strongly encourage you to talk with a tax professional to be completely certain.