With tax season approaching we know that it can be somewhat daunting and even overwhelming to prepare your tax returns. As a small business owner there are a lot of things to consider and account for. That’s why we have put together some practical suggestions and resources to help you tackle this challenge with confidence.
As a photographer just starting out, do I need to have a business license?
When you are just starting out, it is a good idea to establish your business name as a first step. The business name will represent your presence as a professional and help to distinguish you from your competition.
Many cities require you to register your business and business name but some do not. We recommend that you contact your local business bureau to see what the exact requirements are for your specific area.
A great resource for basic information on this is available here.
Do I need to be charging sales tax?
Whether or not you have to charge sales tax depends on the tax laws in the State in which you conduct business. US States have many different rules and the space here does not suffice to give a detailed analysis on each State’s laws. Below we have listed a number of general things to keep in mind regarding sales tax.
As a general rule in the US, any business has to charge sales tax if goods (prints and other photo products) are delivered to an end user in a state in which the business has a physical presence. Physical presence is defined very broadly, it can be the actual location of the business, a sales office, a sales person or other employee who lives in that state and conducts business out of their home. It can also be a state to which you travel frequently to perform business.
Once you are registered to charge sales tax in a specific State, you will have to charge sales tax on any sales made and/or shipped to that State. It does not matter whether a sale takes place in a physical location or over the Internet, for sales tax purposes, you’ll need to look at the place the products are shipped to.
Most US States exempt services (like shipping and session fees) from sales tax. It is necessary to clearly state the service as such and separate it from physical goods in order to not charge sales tax on those services.
Some states, like NY or TX require you to charge sales tax on shipping as long as the goods that you are shipping are taxable as well. In some states, like AL, shipping is taxable if the delivery is made in your own vehicle but not if it is done through a common carrier, like USPS. From just this brief example you can already see that sales tax can be very complex and it is always good to do some additional research and check with your local tax authority.
States usually have a government website where they explain whether or not goods and services are taxable. We recommend doing an online search for your state to find the rules for sales tax on prints, downloads, shipping, and other items that you offer. Also remember that rules might change and it is good to check back once in a while. Here is a list of State Government websites with links to the respective tax authority and other useful links for self-employed and small businesses. First look for the department of taxation and then find a link to the Sales and Use section of the website. There is usually a FAQ section which should answer most of your questions.
Another thing to look out for is the frequency in which you have to file sales tax returns. Some states require monthly returns, while in others it is ok to file quarterly. Sometimes it depends on the amount of sales. Be sure to check the rules in your state.
Please note that it is necessary to register in a state before you can start charging sales tax. This process can usually be completed online, although some states require documentation to be sent by mail. Once you are registered for sales tax, most sates allow you to file them online. Please keep in mind that once you are set up and have started to file sales tax returns, you will have to file returns even in months with no sales.
Do I need to worry about self-employment tax?
When you are self-employed you will be liable for two different types of taxes: Income tax and self-employment tax.
Social Security and Medicare taxes are both self-employment taxes. If you are self-employed you will need to calculate the two amounts on your income tax statement. You can then deduct the employer-equivalent portion from your self-employment tax from your taxable income.
If you make more than $400 per year you are subject to self-employment tax. Currently any combined income above $106,800 is not subject to self-employment tax. If you make more than $600 per year from your business the income is subject to income tax.
Being self-employed you will also be able to deduct health insurance premiums and eligible medical expenses that are not covered by the health insurance on your Form 1040 as a personal deduction. Form 1040 is the income tax form that almost everyone files in some variation.
Please see the IRS website for small businesses to access more information on this.
Some advice on VAT for our photographers outside of the United States
VAT, or Value Added Tax, is a consumption tax. What this means is that ultimately the consumer bears the burden of the tax. When you as a business file your VAT return, you will be able to deduct all the VAT paid by you to your vendors from the VAT charged by you to your buyers. You are only liable to your local government for the difference between the two. In some countries, if the tax paid exceeds the tax charged (in years where your sales is low and you made some larger purchases) you will receive a refund.
Whether or not you have to register your business for VAT depends on the past or expected revenues of your business. Each country has different rules on the limits, so be sure to check the rules for your country of residence.
VAT is usually charged on goods and services. This means that once you are registered for VAT, anything you sell is subject to VAT. If you sell goods and services outside of the country of your business you will need to check whether or not you have to charge VAT on the exported goods. As a general rule of thumb, you will likely have to charge VAT, but there might be exceptions.
Speaking of exceptions, there are some countries that charge neither sales tax nor VAT, most notably Hong Kong and Macao, the countries of the Gulf Cooperation Council, and some of the British Overseas Territories.
When tax time approaches, what are the most important things I need to consider?
The most important thing to consider is to not wait until tax time approaches but to plan in advance and keep track of your business throughout the year. If your business is profitable you will have to make quarterly estimated tax payments. Part of your planning should also be to set aside a monthly amount for the self-employment, income, and sales taxes.
We recommend using a business calendar with the most important tax dates (i.e. dates when estimated tax payments are due, dates when sales tax filings are due, etc).
Keeping track of your income is another important task. You will have some direct income from services and sales. For these you will need to provide receipts or invoices that show a record of your client paying you directly. In other instances you might receive commissions, royalties, payments for workshops or speaking engagements. For these payments you will receive a tax form 1099-MISC in January of the following year. If you are also working for an employer they will provide you with a W2 in January as well. While the 1099 will list only your income, the W2 will list withholdings for tax, social security, and so on.
During the year we recommend that you designate a specific place to collect receipts for expenses. These expenses include things such as office supplies (paper, binders, pens), entertainment (buying lunch for a business meeting, or dinner for your clients), any purchased photo editing software, the cost of your website, etc. Even the smallest expenses can add up so make sure you make it a habit to keep your receipts and collect them in one place. This also goes for bank and credit card statements, sales receipts, and everything that is money and business related. A shoebox, a binder, or a wall calendar with a pocket for receipts works well. This way, all documentation that is needed for tax time is in one place.
If you conduct your business out of your home, and you are planning to deduct home office expenses, your utility bills, rent/mortgage payments and home repair bills should be also part of the information you are collecting.
It is also helpful to have a separate bank account and credit card for your business expenses and your business income. This way at year end it is easier to separate your private expenses from the business expenses.
You will have to keep the receipts and other tax documentation for seven years. Good record keeping not only makes your life easier when tax time draws near, but will also be a lifesaver if you find yourself in a tax audit situation. Also, it’s a good idea to keep your tax returns. The previous years will contain useful information for the New Year and the IRS might require copies of them in case of an audit.
Your taxable income is determined by adding all your income from all your sources and deducting any business related expenses from it. The net of the two is your profit and you will only have to pay income tax on the profit.
Do I need to hire an accountant for my photography business or can I file my taxes myself? Can I use a software program?
It really depends. This is a philosophical question and this preference very much depends on your personality. Generally we recommend that you think about what you are best at and concentrate your efforts on your strengths.
Software programs, like TurboTax or others, are pretty sophisticated and easy enough that you will be able to do your taxes yourself. As a basic approach it is also helpful to look at Schedule C of Form 1040 within your tax return documents. It will give you a general sense of what expenses you can take into account. As long as you have all paperwork ready and receipts organized, you should be fine. Please note that it will take you a few days to finish and this time might be better spent other things that relate to your business.
A tax accountant can also give you some peace of mind and additional security that your tax returns are correct. If this blog post makes your head spin, you might be a lot happier with a tax accountant.
When claiming deductions, can I write off part of my apartment/house since my business is freelance and I work from home?
If you work from home and you have a space dedicated (office/studio) as your main business location, you are able to write off that part of your apartment/house. If you do this, it is a good idea to display your home address/phone number on business cards and receipts.
In order to include this, you will need to calculate what portion of your home is used as office/studio space. If, for example, your house is 1,000 sqft and you are using 200 sqft (or 20%) of that as office space, you will be able to claim 20% of your utility bills and rent and maintenance as business expenses.
When claiming deductions, can I write off my transportation expenses?
If you use your car for both business and private purposes, you should start a mileage chart and note business miles to separate them from your personal use of the vehicle. At year-end you can choose to either deduct a mileage expense from your taxable income or all car-related expenses (repair, depreciation, gas) as a percentage similar to the use of your home office as described above.
As a photographer with an established business and clientele, is there anything I can do to reduce my income taxes?
Your income taxes are calculated as a percentage of your profit. Anytime your profit is high, your income taxes will be high.
It does not make much sense to spend more on business expenses in order to save on income taxes. However, it does make sense to look at another line item of your income statement that is called depreciation. Depreciation is the annual decrease in value on your assets (your camera, lenses, etc.). You would usually select a straight-line depreciation over the useful life of your asset. This means that if you think you will use the camera for five years, and you paid $5,000 for it, it will lose $1,000 in value each year, so your annual depreciation is $1,000.
One thing you can do is lower your taxable income by investing in a retirement plan (a traditional IRA, a Roth IRA, or SEP). This is not only a way of lowering your taxes but also a good thing to look into if you want to save for your retirement. There are limits that apply for annual contribution but those contributions may be tax deductible. Make sure to weigh the pros and cons as you might have to pay taxes and penalties if you withdraw the money earlier than retirement age. Check out this page of the IRS website with helpful links and explanations of Individual Retirement Arrangements (IRA).
Previously we touched on the fact that you can deduct your health insurance premiums. Another way to lower taxes is to contribute to a Health Savings Plan (HSA). You can contribute a certain amount of your income, up to an annual maximum, into a savings plan as a pre-tax contribution. This will lower your taxable income. The plan works like a savings account, so the money will be yours. The limitation is that the savings can only be used for future medical expenses.
We sincerely hope that this information is helpful to you and your photo business. Please note that this is provided for informational purposes only and does not constitute legal advice in any way. We highly recommend that you consider contacting your own accounting or tax advisor regarding these topics.