Aloha artist... are you all pumped up to start your taxes yet this year? Or still a little early to be stressing it?
Well I agree!
Which is why I am getting a nice head start for those of you running a small art biz this year by creating a video full of tips and advice to make filing your taxes as a small art biz owner that much easier this year. Because simpler taxes is always great news!
Disclaimer: I am not a Certified Personal Accountant nor trained in any other way to do taxes professionally nor to give specific tax advice. These are just tips that I have personally implemented or have researched for this video from 3rd party websites as well as irs.gov, but they are not meant to act as a specific guide for you since each person/business/state/situation is different. Use these suggestions as a jumping off point for your own research:)
How to file taxes as an artist
Don’t lie! It may be very tempting to fudge some numbers or not report all your sales so your taxes are a little lower this year, but the IRS is not messing around and they can come collect back taxes for up to 10 years - with the addition of all kinds of penalties and interest (and maybe even a taw lawyer for yourself too!). So do your peace of mind a favor and go ahead and report every sale and don’t take false deductions.
Have a business bank account and business credit card to help keep your biz finances separate and organized from your personal finances. This way you can look at all your expenses as purchases on your credit card and all your income as deposits in your bank account. Ideally, you will put all of your business expenses on one credit card which you pay off in full at the end of every month. Even if in the beginning your expenses are higher than your income and you have to use money from your personal bank account to pay off your business credit card on time (to avoid accruing interest), that’s ok. It’s totally normal. Still doing it this way will be better in the short and long term for keeping things organized and being able to see exactly what kind of money your small biz is brining in.
Make sure to keep all of your expenses and income organized not only into their own accounts, but into their own categories within your accounts. Income should be split into categories like, ‘Retail Sales, Wholesales, Services, Digital Products’, etc. according to what your art biz consists of. Your expenses should have categories like, ‘Internet, Computer Hardware, Mobile Phone, Shipping, Office Supplies, Art Supplies, Resale Merchandise’, etc. This way when the time comes, you will know exactly where your business had to spend money and exactly where that money came from. You know, stuff the government is really interested in knowing. **I really like the free accounting software Wave (not affiliated) because once I set it up, it automatically separates my various incomes and expenses for me. Once a month I just go through and check on things and make a few tweaks and I’m done with all my bookkeeping. Let me know if you’d like a video specifically on how I set up and organized my own art biz bookkeeping down in the comments below :)
Have your art business registered locally as its own entity to collect and pay state sales taxes throughout the year on all your art sales and services. I know, I know…. more taxes?! But yeah, you gotta do it. The good news is that by paying your sales taxes all year long a lot of your bookkeeping will be maintained making these end-of-year taxes soooo much easier! Plus, you have to be registered in order to take deductions (which you definitely want!!).
Once you’re paying federal income taxes at the end of the year, have your business registered as it’s own enterprise such as an LLC or Sole Proprietorship with its own business name. The difference between and LLC and a Sole Proprietor usually has to deal with the size of the small business and whether you have anyone working for or with you. You can watch the video for a more in-depth description of each (including pros and cons of declaring your business either one), but essentially, if you’re like me and a one-person enterprise, you’re most likely going to want to stick with a Sole Proprietorship.
You’ll probably need to fill Self Employment and 1040 forms including W-9s from any freelance or contracted work you’ve done, and W-2s for any regular employment you’ve had throughout the year. Just follow the directions on those or use an online tax service (which I strongly recommend and use myself!).
When it’s time to file, make sure to look for ALL the deductions!! Sit down for a minute and think about every little thing it takes for you to make sellable art, and then to market it, and then to actually sell it. From your art and shipping supplies to your website hosting to the cell phone you use to post on your art-related social medias to the milage you drive to show or deliver your art to the money you spend on editing/workshops/gear to improve your artmaking abilities… it’s all tax deductible because it helps your small business to function and to grow. This is where filing taxes - even as a super tiny newbie creator - makes it all worthwhile.
Yay! GREAT NEWS.. showing a profit every year while starting out is not a requirement for filing taxes! This is awesome news that means that you are allowed to show a net loss for five of your first seven years in business. Sounds almost unbelievable right?! That you could get all these deductibles for your biz having not made enough have to pay Uncle Sam anything yet!?! Dang! But it makes total sense. Most businesses, from the tiniest creative venture to the biggest venture capitalist-backed corporation, are understood to have large start up costs with small initial revenues associated with them as they are just starting out and getting their name in the market. It’s one of the things that make the US such an entrepreneur-friendly country, that the gov knows it takes time to make that first bit of money, and that you’ll get him once you’re good for it;)
Newbie Artists Beware: Don’t file art biz taxes and declare a bunch of deductions unless you are ACTUALLY selling art or art services. Because what can happen if you aren’t really selling and aren’t really trying to sell, is that the IRS can look at your sizable deductions and literal zero gross sales and decide your (potential) art biz is actually a ‘Hobby’ which means you can no longer write off any art related deductions. From what I understand, it can be really hard to shake that label from the IRS for years to come even once you are more legit and really do need to take deductions so don’t shoot your future self in the foot on that one!
Hopefully you found today’s blog + video super helpful! If so, make sure to subscribe to the weekly blog roundup so you never miss any good tips OR when I ask my audience for input or suggestions!
1.16.2022