Author’s Disclaimer: This guide does not constitute legal advice. If you have any questions about your taxes, you should consult an accountant or tax lawyer.
Written by Dr. Daniel Gold, PhD
Edited by Julia Martin
Introduction from the Editor
Taxes can be both mystifying and anxiety-inducing to our creative minds. There are a lot of rules, the forms–both paper and software–are mazes seemingly designed to crush the human spirit. Our aim is to bring in expert voices to provide the best resources and guidance for artists. These are practical tips from a former tax attorney, freelancer in the tech sector, and writer of fiction, approaching from the unique vantage of a highly-informed creative.
We know, from experience, the best way to get past tax time is to go through tax time with as much understanding and preparation as possible, because this is one realm our charms and talents will not get us anywhere. To that point, the author’s cautionary tale:
First, What Not to Do
A successful, retired artist had sought assistance with their taxes–they had unsettled tax dues. Faced with the large outstanding debt to the government, the artist proposed paying in unsold artwork. While they were very nice pieces, this did not go over well. Unsurprisingly, they had to pay their taxes in money, not artwork.
To avoid getting into this kind of situation, the following guide will address some best practices for artists, designers and freelancers preparing for tax season.
1. Pay your taxes on time, set aside money for them. When in doubt, overpay.
In my experience, this is the number one thing that lands freelancers in trouble. They underestimate their tax payments, the interest and penalties would build up, and they find themselves in real trouble.
Even if you’re not sure about the amount of your taxes, or you think you’ve been mis-assessed and you want to contest the taxes you’re being charged, it’s best practice to pay your taxes first.
It’s easy to get behind on filing your taxes, especially if you’re working as a contractor or for yourself, as many Designer, Fotografen und Künstler do; but you can pay your taxes even if you haven’t figured out the exact amount that is owed. Just do a rough estimate, based loosely on the amount you had made that year or the previous year, and try to overpay. This way you can avoid penalties and interest.
Once you’re on top of things, you can file your past taxes and get the overpaid excess back from the government. So, while it’s best not to get behind on filing your taxes, if you do, make sure you still pay what you suspect is owing.
A note about paying your income taxes: some governments provide different direct payment accounts, one for the current taxes owing, and one for future taxes. These two are easily confused. Pay close attention to the account you are making payments to, as correcting this later is a real hassle.
2. Know that your taxes can go up a lot even if your income only goes up a little
The tax-trap for an artist is the unpredictability and fluctuation of your income. Depending on your region, generally, when you’re starting out, and making virtually nothing, there’ll be almost no income taxes. However, in a good year your tax burden can really increase. Because of how tax brackets work at the lower end, depending on the jurisdictions and details, $20,000 in a year might mean a 5% tax ($1,000 in taxes), whereas $75,000 a year could be a 25% tax ($18,750).
Editor’s Note: More money, more problems can be better framed for tax-brackets as a little more money, a lot more problems.
While it can be a damper on any celebration of a new contract, or big acquisition, the best time to plan for taxes is when things are going well. Saving during the good years for taxes and unexpected expenses can prevent surprises and unnecessary turmoil. It can help to have a separate bank account where you set aside money. There may be some ways to roll your income over between good and bad years to try to balance your tax burden, particularly if you run an incorporated business, but you will need to speak to an accountant about that.
3. Know when you are an independent contractor or an employee
Artists and designers often work as independent contractors, which have important tax repercussions. Independent contractors run their own business and can write off business expenses (so they don’t owe taxes on the money spent on these expenses.) However, as such they don’t qualify as employees and do not get the protections and benefits employees get.
Those protections and benefits (including medical insurance, termination pay, overtime, sick days, parental leave, and other workplace protections) are generally worth more than the tax deductions you get for your expenses as an independent contractor. So, if you are employed almost entirely by one business you probably qualify as an employee and should look into that, as it will be more beneficial to you in the long run.
In addition, employee taxes are usually withheld and paid to the government directly. This makes tax filing cheaper and easier, and reduces the risk that you’ll be hit with interest and penalties.
4. Organize your receipts and invoices
Internet beef and audits have one thing in common: they demand receipts. You can do your own books, or hire a bookkeeper. You can file your taxes yourself, or hire an accountant. Either way you are going to need to account for your business expenses and income with receipts and invoices. Figure out a system for sorting and tracking them that works for you: this can be a file folder with tabs if you’re an especially tactile artist, or there are some great online tools and software.
If you want to keep it both digital and simple you can just use spreadsheet (Google Sheets is free). You can keep physical copies of everything, or scan them, even using your phone’s camera as a scanner. Whatever your method, getting in the habit of tracking and organizing your expenses (and income) will make your life much simpler. Plan to keep your receipts and tax records for 7 years. It can be a pain to get old bank and credit card records, so I recommend downloading the whole years’ worth when you are doing your taxes, and keeping them in case you need them for proof later.
5. Research what you can write off
Depending on your work type and medium, there will be different items you can write off. The main rule is: if you bought it for work, then you can write it off. However, remember that writing something off only means that you don’t owe taxes on the money spent on that particular item. You still have less money than if you had not purchased the item at all. So, it is still best not to buy something you don’t need, rather than to write it off.
Editor’s Note: It’s not free money.
A few caveats; meals can often be written off, but usually at a reduced amount, and generally only when they’re part of a business meeting or part of travel away from your home or normal workplace.
Car expenses and fuel have very precise rules to stop everyone from writing them off. Check the rules carefully if you work independently and travel by car for gigs.
Generally, clothing can only be written off if it’s more akin to a costume or protective gear and not something you would wear otherwise, think flack jacket, reflective gear for night shoots, or your painting respirator.
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Larger purchases like expensive cameras and computer equipment must be written off as capital expenses which are deducted over multiple years according to a chart published by the government that varies by the exact equipment in question. In general, capital equipment is used for multiple years and has resale value for some time (like old lens or photography lights.) If you’re the type of artist who requires a lot of equipment, it is worth talking to an accountant to determine how it should be classified.
Tracking capital expenses can be a pain, and is a good reason to consider using accounting software.
6. Tax avoidance schemes are scams
There are dozens of scam courses and fraudsters who promise you a way to avoid paying taxes. Sometimes it’s specialized investment vehicles, weird real-estate deals, offshore accounts, claims that you can expense vacations or use some sort of magic phrase to avoid paying taxes.
These are all scams. Many of them are setting you up for a massive surprise tax bill five years later, when you’re investigated and you owe three times the money saved in back taxes, penalties and interest. Often these schemes will also steal your money directly, because if the investment is outside the normal law, it is also outside your legal recourse to claim the money back when they run off with it.
As a tax lawyer, we had a number of clients who had fallen for these schemes. When the government came for the back taxes, the money had already been spent, and they were in deep, often life-ruining, trouble. If a legitimate investment (offered by an established firm with a physical office and years of history) claims to have some sort of tax advantage, check with your accountant and lawyer first. If you don’t have a regular account and lawyer, you should not be making this type of investment.
No one loves paying taxes, but avoiding them is unrealistic, and ultimately, as creatives we know that taxes fund some of the very programs that support us.
7. Choose the right software
Most accounting and bookkeeping software is good enough. The most important thing is to choose software you will actually use. Look for software you find intuitive. Most businesses have moved towards providing subscription software, and it’s not because it’s cheaper for the consumer.
A few other things to consider are which software your bookkeeper and your accountant use, which ecosystems you might want to buy into, whether you’re selling goods online and if that fits in with a certain software package, and whether you prefer a subscription service or a one-time purchase–and if your sales platform collects and remits taxes on your behalf.
8. Know when to incorporate
There are a number of advantages to incorporating if you work independently. It allows you to avoid certain tax costs, and protects you from certain liabilities. Often you can leave the money in the corporation largely untaxed, and only withdraw it when you need it. This can be very beneficial for retirement and estate planning, and for income splitting with a partner or dependents where it is allowed. However, incorporation increases the complexity of banking; and there are certain unavoidable carrying fees of a corporation.
In general, if you’re consistently making over $75,000+ a year it is worth considering incorporating. You should speak to a lawyer or accountant about this, as everyone’s situation will be different.
In Closing…
To summarize: keep your receipts, know first what a write off is, and then what you can write off. Overpaying and receiving a surprising return is better than underpaying and being met with a shock. It’s worth investing in good software, or even better, a trustworthy expert.
Best of luck. May your ventures be fruitful, your work meaningful, your income high and your taxes low.
