Behind the Scenes: Taxes for Artists
I admit that when I looked at the paperwork for doing taxes by hand for Hint Jewelry, a part of me was running for the hills, but after going to the tax workshop at the Oregon College of Arts and Craft I had a revelation. The information I would need to provide an accountant, who I would pay to do my taxes, were the same exact questions TurboTax was asking me. By knowing the questions up front, I organized my business revenue and expenses around the answers and the process seem a whole lot more manageable.
I suppose this is where financial software like Quicken would come in handy, but what the heck, I designed a new Excel spreadsheet for expenses based on the questions from TurboTax and an example of an income statement from the Small Business Administration. Why am I going to such great lengths to build an income statement for Hint Jewelry? To expand Hint, at some point I may have to apply for a business loan and this would require an income statement. Why not start practicing now?!
I'm sure designing my own accounting spreadsheet is making somebody at Quicken cringe right now. Besides being lazy about purchasing new software, I'm of the mindset that by building my own organizational tool, I'm more in tune with how my business runs and cash flow happens. Getting into the organization and math of Hint Jewelry's finances is empowering. I'm not ready to hand that experience over to someone else at the beginning stages of Hint Jewelry before I know how it all works.
Here are some tips that came out of my Taxes for Artists class:
1. Take a class on taxes -- hey, you can write this off as an expense and it was great to meet people who had similar questions about art and business!
2. Keep accurate records of everything: business income, expenses by category, and travel. Keep receipts for three years.
3. Keep a journal and take notes of purchases, vehicle mileage, and travel expenses. This journal can be used in conjunction with your receipts during an audit. For any expense, answer these key questions: who, what, where, when, and why?
4. Keep records of gifts and refunds, which will impact your final inventory.
5. Contributing to an IRA is beneficial because it lowers your adjustable gross income.
6. If your business is run out of the home, be sure to add a rider to your homeowners insurance, which can be reported as an expense.
7. The self-employment tax rate is 15.30% of 92.35% of net self-employment income: 12.4% Social Security on the first $106,800 of net income and 2.9% for Medicare on all net income.
8. Read the small business IRS.gov guidelines for travel expenses.
9. Unless a charitable contribution resulted in marketing or advertising, it is not a business expense for a sole proprietor. Charitable contributions can be taken as a personal deduction.
10. If you are recording expenses for property such as a phone or computer and these items are used for both your business and personal life, you must know the percentage of business use and provide a phone bill and computer work log. It seems easier to me to have a separate phone and computer that is used solely for your business then go through this hassle.
11. Open a bank account for your business and and get a credit card for your expenses. This will keep everything clear and separate from your personal life.
Here's a cheat sheet for what things to keep track of:
Shipping and Handling
COST OF GOODS SOLD
Material Purchased (directly related to cost of making your product)
Freight-In (cost of shipping material to you)
Direct Labor (if someone makes a part for you and charges you labor)
Indirect Expenses (small tools and material that is part of the process of making the piece like a chemical)
Credit Card Fees (PayPal processing fees)
Delivery Expenses (shipping supplies)
Web Site Fees
Miscellaneous (books, classes)
Operating Supplies (furniture, computer, software)
Permits and Licenses
Vehicle Expenses (gas, oil, repairs, insurance, registration fee, parking)
For more information on running an online business check out my whole Behind the Scenes blog series.