We creative types forget that the taxman requires some bean-counting on our part, and they want their cut. If you’ve been an employee up until now, or you’re fresh out of design school, or your creative mind is so much in the ether you’ve never given this a thought, it’s time to learn.

IRS

In addition to your 1040 or 1040EZ, if you are a sole proprietor, you’ll need to file a schedule C, where you’ll deduct your business expenses and claim your business income. I know it’s tempting to claim just about everything you do as a business expense, because you live, breathe, and eat your business 24/7, right? No, the IRS doesn’t see it that way. If you take a trip for pleasure and discuss something about your business in a conversation over drinks, you can’t write off the whole trip. If you work in a corner or your bedroom, as I do, you CANNOT claim a portion of your rent or mortgage and utilities as an expense. You have to be working in an area that is totally dedicated to your business, like a room, or a partitioned area. Say your home is 2,000 square feet, and your office is 100 square feet. You get to claim 5% of your mortgage or rent and utilities as an expense. I’ll go into more detail about what you can and can’t deduct in a future article, but you should always talk to your tax preparer about this.

You’ll also file a Schedule SE (Self-Employment), and this can take an unexpected chunk of your money. Approximately 15.3% of your income is taken for social security and Medicare. If you are employed by someone, your employer pays half of that, and you pay the other half. When you are self-employed, you pay the whole 15.3% of your profit, not your income. You get to deduct half of that SE tax on your 1040 from your taxable income – not your total tax. The other half is added to the tax you’ll owe.

State

The state may also takes its cut, depending on where you live. Find out what’s required.

Sales Taxes

“What? I have to collect sales taxes? It’s not like I’m selling widgets!” Yeah, you probably have to collect sales taxes. Again, check with your state to see what you need to do. Here in the state of California, it’s the Board of Equalization, and their collection efforts make the IRS look like a bunch of teddy bears. The way they see it, you have a fiduciary responsibility to collect the sales taxes the state requires you to collect, and to remand those monies to the state at the required time. If you do not, they will happily empty your bank account(s), and they don’t care if it’s going to make your rent or mortgage payment bounce. I recommend collecting those taxes during the year and putting them in an interest-bearing account, such as a money market account, so you can at least make some money off of the state.

“But why would I have to collect sales taxes if I’m just creating a logo?” Because you are creating “tangible personal property,” and that’s taxable in the state of California. Download their audit manual, chapter 11. WARNING: It’s nearly incomprehensible. For some of you designer types who failed math and English, it will be incomprehensible. Get over it. Read it anyway. Call up the BOE and ask lots of questions. This is a business you’re running, folks, and it doesn’t run solely on your creative juices.

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No Shoeboxes – Getting Organized

I do not accept that because you’re one of those artistic types, you just can’t do better than throwing your stuff in a shoebox, which you hand to your tax preparer at the end of the year. I am a graphic designer, web developer, fine artist, and textile artist, and I don’t do this. First of all, your tax preparer is going to charge you more money to prepare your taxes (on top of their hating you slightly). Second, if you aren’t keeping good records and filing things properly, how do you know you’re charging enough for your work or saving enough or spending too much? Third, if you do get audited (that spare bedroom for your office you’re claiming just increased your audit risk), how will you prove your expenses are legit if they’re shoved into an empty drawer in your dresser for the last 5 years?

Get a file cabinet, some hanging folders, and some manila folders (get the pretty colors if it floats your boat – they’re more expensive, though. I like the pretty colors better myself). Set up a filing system for your personal finances and your business finances. I use a single folder for every tax line item.

Do your bookkeeping in Quicken or QuickBooks or hire someone to do it. Then, at tax time, you hand your tax preparer a tax report from your program and copies of any year-end tax papers you receive, like 1099-Misc, and they’ll do the rest.

I’ll go into more detail on these topics in another post…

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This entry was posted on Thursday, July 2nd, 2009 at 12:18 pm and is filed under Bean Counting. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.