Introduction: Tax Prep for Creative Professionals
Tax season is upon us, and creative, visual people can often be daunted by what seems like a lot of scary math. Fearing the process, I used to do the most basic of free online filings and get back pretty minimal returns. As my career as a creative professional grew, not only did I start to deal with a lot more confusing forms (multiple W2s, 1099s from freelance work), I also realized I was missing out on a lot of career specific write offs that I didn't know how to incorporate into cookie cutter online forms. Changing the way I approached my taxes has resulted in significantly larger returns and a feeling of confidence and command in my finances. Hooray for grown up stuff! And what could be more grown up than camping out on the couch in your pajama pants with some hot cocoa on a rainy day and getting those taxes taken care of!
This Ible will explore tax prep tips for geared toward creative professionals operating the in U.S. Most of these tips will be based on examples involving visual arts, since that is where I'm coming from, but many apply to those working in music, writing, and other forms of entertainment too. While I can't guarantee any specific jump in your tax return, I do think you'll find that being prepared will yield better results, plus you'll feel more confident having an active hand in your tax destiny.
Step 1: Who Is a Creative Professional?
While this title can mean many different things, I feel a safe generalization is that you might want to look into handling your taxes as a "creative professional" if 50% or more of your income can be attributed to creative business(es).
For example, you might work in a graphic design firm, a photography studio, a post production house, as an in-house writer for a social media outlet or website, or in a specific division of product design (like painting faces on dolls at a toy company). Even if you are a full time employee and can say you have a 'regular" job, creative fields like these often extend beyond office hours and into your home life. We'll talk more about this in the write offs section.
If you are primarily a freelancer for creative industries, working project to project, I HIGHLY encourage you to approach your taxes in the manner explained in this Ible. Your livelihood and life are often very intertwined and this will mean you're probably able to write off things you didn't realize you could. Examples might be a career as a wedding photographer, if you own your own bakery, furniture shop, or jewelry studio, or voice actors who read for commercials and audio books.
If you earn a significant income from your Etsy (or other web based
shop), whether or not you have a "regular" job as well, you might want to consider this. The fees you pay for ads on websites, your business cards, booth fees for events and conferences, and other deductions are within your reach as an independent craftsperson.
Step 2: Find an Industry Specific Tax Professional
I can not recommend this enough. Online or general tax services (like
Turbo Tax or H&R Block) are all well and good for most people, but after dealing with an industry specific tax guy I would never go back! Someone acquainted with the terminology and rhythms of creative business will be easier to communicate with and will have insights about business related write-offs that you may not have thought of before.
This is especially handy if you do a lot of freelance or independent contractor work.
A tax person accustomed to creative/ entertainment clients will know exactly what to do with a pile of 1099s. A general tax consultant may know what to do technically speaking, but may not understand that this is your "normal". I recall one such person looking at my 1099s and then asking me if I was planning to get a "real job" for next year. Wrong response!
How to Find One
Simple --ask around! Ask your creative colleagues if they have anyone they would recommend. Have a union? See if anyone there has a tax wizard. Chances are at least one of your peers or co-workers has a tax person they trust and endorse. Referrals also give you an edge as many tax firms are more likely to make time within a busy schedule to see a friend of a current client than they are a total cold call.
Consulting colleagues means you can also gather information and compare options from an insider's perspective.
How much does an appointment typically cost with this person? Does their calender fill up fast? Are they easy to work with? Do they offer appointments by mail or phone if your schedule is packed? After hearing about several animation specific tax people from co-workers, I went with one guy whose rate was fair and whose correspondence made me feel most at ease.
Ok...so what if you're an Etsy seller in the middle of Wyoming and you don't have workplace colleagues to ask?
Connect with other creatives through web forums to build that colleague
base! Post where you spend most of your time and suspect other creative individuals will be hanging out too. Seek out folks in your area. Whether or not they have the answer to your tax query, you'll be glad you made some personal connections.
True, an industry specific tax person may seem daunting at first because they will likely charge more than what you're used to. If stuff like Turbo tax is somewhere between free and $50, expect private, industry specific tax folks to be at least $100. Nothing to sneeze at, but consider what you gain:
--Most of these tax guys establish friendly relationships with their clients and are happy to answer your questions prior to tax time via phone or email. Not sure whether something is a write off? Ask. Trying to make sense of a form you got from your bank? Ask. The last thing they want is for you to show up to your actual appointment unprepared, so giving tidbits of support in advance helps you help them help you. You may not be able to count on that support from a general tax service, especially one who does not know your history. Feeling confused while trying to click through an online tax form is THE WORST!
--Larger return. Again, I can't guarantee what type of boost you'll see, but I'm almost certain you'll notice a positive difference. Understanding how to document and submit appropriate write offs can really add up. It can potentially bring your tax return up hundreds of dollars. That suddenly makes your difference in appointment cost well worth it. If you started too late to nail it this year, you know what to do for next time!
--Trustworthy connection for future financial endeavors. Finding a great tax person can pay off at more than just tax time. Many of these professionals are also financial advisors and can provide insights or recommendations on other subjects such as investing or home buying. They'll also have your financial information on record and easy to access, so in the event you have to bring copies of your last two tax returns in for a loan pre-approval, you'll know exactly where you can get these with zero digging. Again, we creative people are not always the best number crunchers and having someone trustworthy to break down this stuff for us can take a lot of the stress out of big acquisitions. General tax institutions and banks can also offer suggestions, but may be more interested in selling the products they partner with than finding what is best for you personally.
Step 3: Write Offs
Essentially, any expenditure you have made to legitimately support or further your creative business/ career is a potential write off. My tax professional provided me with this spreadsheet and said to tally my receipts and documents for as many categories as possible. Math-phobic folks often just take the standard tax deduction because this process of itemizing write offs sounds like a lot of work, but it really doesn't have to be and it can pay off (literally) when it comes to your return.
Note that everyone is allowed to write off thing like medical expenses, your annual vehicle registration fee, and donations to charitable organizations. This is not specific to creative professionals, but I felt it was worth mentioning here for anyone approaching their own taxes for the first time. At first I felt like this was somehow cheating the system but my tax professional assured me this was all legitimate and well within reason. As long as you save your physical documentation of the totals you submit, should you ever have to prove something in an audit, you're good to go. Such documents might include receipts, online billing statements, or sections of invoices to clients.
Business Write Off Examples. These examples pertain to visual arts and entertainment, but reading them may help those of you in other creative industries better understand what types of documents you might want to start saving, or what you might ask your own tax professional about.
Business Meals -- Any meal over which business was discussed is technically a "business meal".
Did you meet a potential client for coffee? Maybe you grabbed lunch with a former co-worker and discussed job opportunities where he is now. Perhaps you attended a union mixer at a local restaurant/ bar and got something to nibble on while networking. All of these receipts can be saved and written off. Just know where to draw the line and be honest with yourself. Going out and drinking beer until 2 a.m. with people who just happen to be co-workers is not a "business meal". Just picture yourself in front of an auditor. If you would have trouble holding up this receipt for 12 beers and keeping a straight face, just don't try it. That one is on you.
Travel--Hotel and airfare to events where you network and keep abreast of the latest industry trends are legitimate write offs. For me, this includes things like Comic Con and Wonder Con. Consider the festivals, conferences, and trade fairs you attend throughout the year (Maker Faire, CHA, etc). If you have to pay for parking while you attend said events, that can also be logged as an expense. As long as you're spending significant amounts of time making new connections and talking trade (not just lounging by the pool), save those receipts!
Home Office --If you're an independent contractor, freelancer, or take a lot of work home with you on nights and weekends, you likely qualify for two different types of home office related write offs
Equipment, Tools, and Supplies-- If I buy a new computerupon which I will be doing design freelance, that's a write off. New webcam for filming reference videos? Write off. So, if you're a voice actor and you want to make your own in-home record booth to use for your professional gigs/ demos, you can write off things like your computer, microphone, recording software, and the sound buffering foam you line the room with. These items are all contributing to your ability to do quality work from your home office setting. Again, try to stay honest with yourself about what you write off. Unless there's a true professional reason that you need a 42 inch flat screen in your recording booth, don't try to slide that on the tab too.
Home Office Space-- If you work from home consistently, your tax professional may even suggest writing off a portion of your home utilities and rent under business use. My tax guy asks me for my total utility and rent costs during the months I worked from home, then uses the square footage of my actual home office area vs. total home square footage to determine a percentage that can be written off. If your "office" is more of a garage/ workshop setting, ask your tax professional whether this formula can apply and whether you would have to provide any different or additional documentation.
Promotional Materials --Expenditures related to promoting yourself/ your business are definitely good write offs. The money you pay to print business cards, buy a banner to hang above your craft fair booth, or run promoted ads on sites like Etsy all qualify. Print your e-receipts soon after purchase so you don't forget about these costs at tax time.
Phone or Internet Expense -- If your work involves a lot of calling or web research from home, you may be able to write off a percentage of those bills as business related. My tax guy has a standard percentage he applies each year, based on an average. Some tax professionals may try to nail down a more specific amount if your work is very phone or research oriented.
Professional Expenses --This is a broad category that can include any other creative industry expenses you might have. If you are in a union, you can tally up your quarterly dues for the year. Subscriptions to trade magazines keeping you up to date on industry news is another one. In the film/ entertainment industry, there's a category called "research and reference" that can include movie or museum tickets, and even your Netflix subscription fee. While these last ones are undoubtedly part leisure, they do help you stay in the know about what's being made and who is making it. Think about what you as a composer, prop maker, seamstress, logo designer, baker, camera operator, or blogger might be paying for that could be considered a professional expense.
Step 4: Starting Organized and Staying Organized
Among the reasons I've heard people give for why it's "too hard" to keep track of receipts for itemization is the assumption that it's going to be a big mess to sort through at tax time. Well, if you're just throwing everything into a shoebox, then yeah. If you establish a simple, clean filing system from the beginning (and remember to use it), it all falls right into place when you go to do your write off tallies.
Designated Filing Location -- I highly recommend getting a folio with multiple tabs. This way you can divide the folio into simple categories for your main document types (Example: W2s, 1099s, Interest Income, Write Offs, etc).
Keep this folio in a spot that is easy to access (i.e. NOT the top shelf of the closet behind the wrapping paper) so that you can make a habit of filing your documents/ receipts on a regular basis. Remove receipts from your wallet or purse weekly and take 5 minutes to put them in their proper envelopes. It really beats sorting through a giant heap of little papers at the last minute.
Subcategories-- To create subcategories within one of these folders --let's say "write offs"-- I like to use labeled envelopes. So, within the "Write Offs" section of my folio, I might have different envelopes for Business Meals, Travel, Medical, Pro Expenses, Auto, etc. These envelopes can be recycled from your mail since they don't need to be pretty --their only purpose is to contain and divide. If one of your envelopes becomes full before the end of the year, simply start a second and label it "Business Meals 2", or whatever the case may be.
Streamlining with Statements -- Still daunted by the notion of having to keep track of so many little receipts? You might consider streamlining your documentation process by always using a particular credit card for a designated category of write offs. For example, I have one credit card that I use exclusively for all my "Business Meals", since that is one of my biggest categories. By always using the same card, I can simply total up my 12 monthly credit card statements rather than having to save dozens upon dozens of receipts and punch them in individually.
By keeping your documents and receipts categorized and organized all year, calculating totals for your tax professional is simply a matter of sitting with a calculator for 30 min or so and recording your results. The "work" of sorting has already been done for you, so you can even take care of this while you watch something on t.v. You'll be surprised how much you actually spent over the year, and how keeping record of that can help you get some back.
Step 5: Know Your Exemptions
Laws vary by location, but chances are if you operate a freelance or independent creative business you have to have a registered Business Tax License with your city/ state. Since you will make an annual report of your creative business revenue, it is smart to know what tax exemptions you might qualify for.
For example, the City of Los Angeles has a creative business tax exemption. As long as you make less than $300,000.00 from your creative labors in a calender year, you will not owe the city any tax.
Check with your local Office of Finance (via phone call or browsing the website) to gain a better understanding of your tax responsibilities and exemptions. Find out if you need to be classified under a certain type of business in order to apply any creative exemptions your area may offer.
*NOTE: Even though you may be exempt from paying CITY taxes on your creative income, that does not mean you don't have to report the income on your state and federal taxes. Always keep records of those amounts and report accurately. This tip about city tax exemption is simply to prevent you from paying more than you are otherwise required.
Step 6: Happy Filing!
I hope this information will help some of you feel better prepared and more in command of your tax filings this year. Wishing you big returns and business success in 2016!
If you found this Ible useful, consider sending a vote in the Hack Your Day or Rainy Day contest. If there are any creative professionals out there with additional tax time tips for the community, I welcome your contributions in the comments below. Let's all help each other work and live smarter :)
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