Taxes for Photographers

[stacyreeves]

Someone asked about taxes in another thread, and I was going to link them to the tax code thread that is stickied in this forum, but I read through it and realized that because it was written over five years ago, a lot of it is no longer true, and people following it could get themselves into some hot water. I think it would be a good idea to start a NEW thread with more updated info!

Let me preface this with the most important piece of advice you will ever find on any forum regarding taxes: TALK TO AN ACCOUNTANT. We can all offer up lots of advice, but that advice may be wrong, or outdated, or even illegal, so always always always talk to an accountant before making any tax-related decisions.

WHEN STARTING YOUR BUSINESS

There are a couple of tax related things you need to do when starting a photography business. The first is to figure out your business name, then get a DBA (“Doing Business As”). Generally you get this from the County Clerk's Office in the county you live in (or the county where your studio is, if you have a studio). This is what most people mean when they refer to having a “business license.” This registers your business name so that no one else in the county can use it, and it also makes you an official business. Some banks and other services may require this in order to get a business account with them. It's very simple to get, you just fill out a form. There is a fee, but it's very low – I think it was $20 when I got mine.

Second, you need to get a sales tax permit. This process can take a little time, so start it immediately. You can register for a permit at the State Comptroller's website here: Texas Online Tax Registration Application I am pretty sure it's free (I might be wrong about that) but the important thing you need to know is that you must start filing your sales taxes immediately after applying for a permit. The comptroller's office will tell you if you have to file them annually, quarterly, or monthly (most people will file quarterly) but you MUST file them, even if you didn't make any money. It's very simple to file your sales taxes, they have an online system than takes less than five minutes to go through. Just don't forget about it, because sales tax penalties are HUGE!

A couple of additional notes about sales tax. First, in the state of Texas we pretty much have to charge sales tax on everything. Travel fees, session fees, prints, everything. The one and only exception that I know of is a session fee where the client literally gets NOTHING, EVER. If the client gets anything at all from the session at any point, even if it's one digital file, even if they purchase it years after the session takes place, you must charge sales tax on everything related to that session. To be safe, just charge sales tax on everything. Second, you must personally collect and remit taxes on any print sales of your work, even if someone else does the selling, printing, and shipping of the prints. That means that if you use a third-party site to handle your print sales such as Pictage, SmugMug, Collages.net, etc, they either have to charge sales tax and then send it to you so that you can pay it to the government, or you have to invoice each of those clients individually for the sales tax after their order. The website I use, ExposureManager, has set up their system for Texas photographers so that they charge Texas sales tax and send it to the photographer to pay.

A letter from the sales tax office about photographers: http://www.window.state.tx.us/taxinf...s/tx94_176.pdf (Remember that sales tax laws can change often, and it's your responsibility to keep up with the changes. An accountant or bookkeeper can help you with this, or you can call the comptroller's office at any time, they are very nice and helpful.)

Another item that you will want to do is to register for an EIN, or Employer Identification Number. This is something you do through the federal government. An EIN is like a Social Security Number for businesses. You don't HAVE to have this if you file as a Sole Proprietor, but you will have to have it when you incorporate (which you will probably want to do at some point), so it's good to just get one anyway. It's free and easy: https://sa2.www4.irs.gov/modiein/individual/index.jsp You'll need your NAICS code to get that. Here are some common ones:

Wedding and/or Portrait Photography: 541921
Commercial Photography: 541922

Next, you'll want to find a good accountant and maybe a bookkeeper.

An accountant deals with taxes, usually federal income taxes. This is something you should NOT do yourself, unless you are a CPA. It's best to find an accountant who specializes in photography businesses, or at least one who specializes in small home-based businesses. Your income tax accountant can be located anywhere in the country, since federal tax laws don't vary from state to state.

A bookkeeper deals with day-to-day numbers, such as keeping track of your payments, expenses, sales tax, etc. Most people choose to be their own bookkeeper, which is what I recommend, but you do what's best for you based on your familiarity with finances. Software like QuickBooks can be a huge help with day-to-day bookkeeping.

Once you have a good accountant, talk to them about whether you should file as a Sole Proprietor or incorporate.

Being a Sole Proprietor means that, in the eyes of the government, you and your business are the same entity. Your taxes and your business' taxes are the same, and your legal liabilities are the same. The good part about being a Sole Prop is that filing taxes is easier and faster, and you don't have to deal with franchise tax. The bad part about being a Sole Prop is that if someone sues your business, they also have access to all your personal assets. You also usually pay more in taxes as a Sole Prop because 100% of your earnings are subject to FICA (aka Self Employment Taxes). There is no additional paperwork, other than getting a DBA, required to be a Sole Proprietor.

Incorporating your business means making the business its own independent entity, completely separate from you. There are many forms of incorporation – LLC, S Corp, C corp – and you'll need to talk to your accountant to figure out which one is right for you. The good part about being incorporated is that there is some liability protection in lawsuits, and you'll generally pay less in taxes, because you can shelter some of your income from FICA (although that's not a 100% great idea, since that basically means you're cheating your own retirement fund). The downside is that it can be very expensive to incorporate (mine cost $1000 in fees to the govt, my account, and my lawyer) and you'll have to file your Franchise Tax every year. Most people won't pay franchise tax, but you still have to file, which your accountant can do for you.

Don't believe anyone who tells you that it's “better” to be a Sole Prop, LLC, S Corp, whatever.. They each have their pros and cons. What is “better” for you depends on you and your situation. Talk to your accountant. That said, most photographers choose to be a Sole Proprietor for their first few years, until they start turning a substantial profit, then they incorporate.

RUNNING YOUR BUSINESS

Once you have done all the steps above, you're ready to actually conduct business in the state of Texas! Yay!!!

A couple things to know about taxes. There are two types of federal taxes you will pay, usually. The first is income taxes, which we all know about. The second is FICA, which is sometimes referred to as Self Employment Tax and/or Payroll Tax, depending on the context. FICA is Social Security and Medicare (think of it as a government-mandated retirement savings account). When you work for someone else, you pay part of FICA (currently 4.2%), and your employer pays the rest of it (currently 6.2%). When you employ someone else, you pay part of it, and they pay the other part. When you work for yourself, you pay the whole thing. Many people forget to factor this in when saving for taxes, so be sure to save around 10% extra to pay your FICA.

There is a big difference between what people refer to as your “tax bracket” (called your “marginal tax rate”) and what your actual tax rate is (called your “effective tax rate”). For example, if you make $100,000, your marginal tax rate/tax bracket is 28%, but your effective tax rate (what you ACTUALLY pay in taxes) is 19%. The reason for this is that the government doesn't tax all of your money at the same rate. Here are the 2010 tax brackets for single taxpayers:

$0-$8,375 - 10%
$8,375-$34,000 - 15%
$34,000-$82,400 - 25%
$82,400-$171,850 - 28%
$171,850-$373,650 - 33%
$373,650+ $108,421.25 - 35%

The way this works is that the first $8,375 you make will be taxed at 10%. The next $25,625 you make will be taxed at 15%. The next $48,400 you make will be taxed at 25%. So on, and so on. An easier way to look at it is like this:

$0-$8,375 - 10% of the amount over $0
$8,375-$34,000 - $837.50 plus 15% of the amount over $8,375
$34,000-$82,400 - $4,681.25 plus 25% of the amount over $34,000
$82,400-$171,850 - $16,781.25 plus 28% of the amount over $82,400
$171,850-$373,650 - $41,827.25 plus 33% of the amount over $171,850
$373,650+ - $108,421.25 plus 35% of the amount over $373,650

To find your effective tax rate, you'll have to actually do your taxes, then figure out what percentage the amount you paid is in relation to the amount you earned. This doesn't help you much to first couple of years, but after a few years you'll figure out what your effective tax rate is, and that will help you better plan for your taxes. For the first couple of years, set aside a full 30-35%, just to be safe, but most people end up paying around 15-20% in taxes.


A type of tax a lot of people don't know about is Use Tax. Use Tax is like Sales Tax for out-of-state purchases. Remember that sales tax is ultimately the responsibility of the PURCHASER, not the Seller. Even though laws mostly require the Seller to collect and remit the sales taxes, it's still the Purchaser who is paying the tax, and if the Seller doesn't collect and remit the sales taxes, the Purchaser is responsible for doing so on their own. What this means in layman's terms is that residents of the state of Texas are required to pay sales tax on almost everything they buy. If the business they buy from doesn't charge the sales tax (for example, when they make a purchase online or buy something out of state and bring it back home), they are legally required to file and pay Use Tax on that item. Obviously there's no practical way for the state to enforce this on regular citizens. They can, however, enforce it on businesses when they come up for a sales tax audit, which is way worse and way scarier than an IRS audit, trust me. Essentially, all of that boils down to this statement: If you make a big business-related purchase online, such as a camera or a computer, and they don't charge you sales tax, then you should go ahead and pay Use Tax on it. The only exception to this is something that you are buying not to use, but to resell, such as prints, frames, and albums. You are not required to pay use tax or sales tax on these items.

To best prepare yourself for your taxes, here are a few suggestions:

-Always set aside more than you think you'll owe. Not only will you be teaching yourself to live on a smaller budget, which is always good, but you'll more than likely get a nice big bonus at tax time, instead of a big fat bill.

-Keep track of literally EVERYTHING you spend. It's amazing how much people overpay in their taxes because they were too lazy or disorganized to keep track of their expenses. Literally every purchase you make is a deduction (sales tax), even if it's not business related, so figure out a good system for keeping track of these and stick to it. Receipt scanners can be super helpful, or you can do it manually using an Excel spreedsheet or some other software. Specifically, keep track of this info: Date, Location, Amount spent, Items purchased, Sales Tax amount, and what (if any) relation the purchase has to your business. Keep your receipts for at least three years, just in case you get audited.

-”Tax-deductible” is not a synonym for “free.” Just because something is a deduction doesn't mean you don't have to pay for it, it just means you don't have to pay income taxes on it. Basically, it's like getting a 15% discount on that item. If you ever hear someone say “I didn't need ______, but I bought it anyway because it's tax-deductible” then make a mental note that that person should never ever be trusted for tax or financial advice.

-You only pay taxes on your profit, not your cost. This means that if you charge $1000 to shoot a wedding, but that wedding costs you $400 to shoot, you're only paying taxes on that $600 you made in profit. This is important to know both when setting your prices and in determining how much to set aside for taxes.

-Open a savings account and use it as your tax escrow account. Whenever you get a payment from a client, transfer the sales tax over to that account, as well as whatever percentage you are setting aside for income taxes (I recommend setting aside 30-35% of the profit). That way, when it comes time to pay taxes, you can pay it directly out of that account and you won't have to stress about how to pay your tax bill. Make sure you keep good records of how much you've put in there for income tax each year (a good idea is to note how much is in the account on December 31 of each year). Then in April, once you've paid your taxes, subtract the amount you paid in income taxes (plus the amount you paid in sales taxes in the last month or quarter of the previous year) from the amount that was in the account on December 31, and that's your annual bonus! YAY!!!

-Speaking of bonuses, don't forget about retirement. That's really an entirely different discussion, but a good idea is to put that year-end bonus that you get into a 401k or an IRA account. Since you had already put the money aside, you won't miss it. DO NOT put off planning for retirement. Find a simple solution, such as setting aside that year end bonus or putting aside 10% of every payment you get, and stick to it. A financial advisor can help you look at the options and find a plan that's best for you.

I'm not a tax or finance expert, so take everything I've said here with a grain of salt, and make sure to verify it on your own with a lawyer or accountant. If anyone sees an error in what I've said, or has anything else to contribute, please mention it!!

I know taxes and finances are really scary for a lot of people, especially us creative types, but I promise you it's not nearly as difficult as it seems. When I started my business the idea of managing my own finances was terrifying to me – it literally kept me up at night worrying. Now I LOVE finances and taxes, and it's actually pretty fun for me getting to see where all my money goes and learning all the tax laws. If you can get over that initial fear and just take some time to set up a good, easy to use system for yourself, you'll learn to love it, too!

Last, but most importantly, don't even THINK about cheating on your taxes. I know it's tempting, especially if you disagree with what the government is doing, but you're putting yourself and your family at risk. Just the other day a small business owner in Lubbock (a moving company, I believe) was sentenced to six months in jail and tens of thousands of dollars in fines for failing to collect sales tax, and we all know stories about people who ended up bankrupt or in prison because of tax evasion. I know a photographer in Dallas who was not charging sales tax and she just got caught, and she's now facing a $40,000 tax bill and potential jail time. Do you really want to be that guy? Pay your taxes. Just do it.

[LauraM]

This is amazing! There is so much packed into this! Thank you for sharing!!!!! You are the business master! haha

[sn805619]

Wow, awesome post! I will have to say this part was my favorite :)

Originally Posted by stacyreeves

-”Tax-deductible” is not a synonym for “free.” Just because something is a deduction doesn't mean you don't have to pay for it, it just means you don't have to pay income taxes on it. Basically, it's like getting a 15% discount on that item. If you ever hear someone say “I didn't need ______, but I bought it anyway because it's tax-deductible” then make a mental note that that person should never ever be trusted for tax or financial advice.

[stacyreeves]

Scott, I actually had someone tell me that they didn't care about the interest rate on their mortgage because it was tax deductible. It was a serious facepalm moment.

[Abel]

Thank you so much for posting this... I will definitely point others that have questions about starting their own business to this thread. Thank you.

I just Shared it on my Facebook Wall...

[dracula02]

tag!

[pbyd]

Stacy, great info, but photographers in Texas must also pay Business Personal Property Tax once a year on any property that is used in the business. If your city is like Houston you must have an Occupancy Permit ($500.00 per day fine if you are caught without one).
Wayne
Photography by Design

[sn805619]

As a note, I believe the Business Personal Property Tax and the Occupancy permit are two different things.

As I understand it, although TX law requires a business owner to pay the Business Personal Property Tax, most folks do not file because the penalty for not filing is so small. EX: you have photo equipment worth $20,000. The annual personal property taxes, based on a 3% tax rate, are $600. The penalty for not filing would be $60. The law clearly requires a business property owner to file, but the decision whether to render depends upon the owner's specific circumstances (records, risk tolerance, etc.).

The Occupancy permit sounds like something you would need if you had a studio/etc, do you need a permit if you have clients come to property/building that you do not own (and is public)?

Note: None of this post is advice, contact your CPA for your particular circumstances.

[XtremePhoto]

Originally Posted by sn805619

The Occupancy permit sounds like something you would need if you had a studio/etc, do you need a permit if you have clients come to property/building that you do not own (and is public)?

Yes, it is the business' responsiblity to secure the occupancy permit, NOT the owner of the property. And EVEN if it is your HOME, you are still required to have an occupancy permit if you see clients in your home. (In the City of Houston and several other surrounding areas, though not in all.) Not to mention meeting ADA mandates. No one pays attention to them though, until they get caught and have 10 days to correct it all or be fined.

-G-

[XtremePhoto]

Originally Posted by stacyreeves

Another item that you will want to do is to register for an EIN, or Employer Identification Number. This is something you do through the federal government. An EIN is like a Social Security Number for businesses. You don't HAVE to have this if you file as a Sole Proprietor, but you will have to have it when you incorporate (which you will probably want to do at some point), so it's good to just get one anyway. It's free and easy: https://sa2.www4.irs.gov/modiein/individual/index.jsp You'll need your NAICS code to get that. Here are some common ones:

Even if you are a Sole Propreitor you MUST have an EIN if you have Employees or you plan to deal with most major corporations.

Further, if you have employees, you will have to set up an account with the TWC (Texas Workforce Commission) as well as your EIN. Their fines and penalties are pretty stiff too.

-G-

[pbyd]

Originally Posted by sn805619

As a note, I believe the Business Personal Property Tax and the Occupancy permit are two different things.

As I understand it, although TX law requires a business owner to pay the Business Personal Property Tax, most folks do not file because the penalty for not filing is so small. EX: you have photo equipment worth $20,000. The annual personal property taxes, based on a 3% tax rate, are $600. The penalty for not filing would be $60. The law clearly requires a business property owner to file, but the decision whether to render depends upon the owner's specific circumstances (records, risk tolerance, etc.).

The Occupancy permit sounds like something you would need if you had a studio/etc, do you need a permit if you have clients come to property/building that you do not own (and is public)?

Note: None of this post is advice, contact your CPA for your particular circumstances.

Yes, Business Personal Property Tax and your Occupancy Permit are two different things.
Occupancy Permit is a city law, it is required even if you work out of your home, if you see clients in your home.
Both of these laws are not followed by most of the people starting out in business, but then most clients don't follow copyright laws, so I guess by this reasoning if we as photographers don't follow the law then it must be okay for clients to steal our images by not following the copyright law.
In other threads people often ask the question "What is a professional photographer?" well I for one feel that a professional is one that follows the Federal, State and City laws and codes.
Just saying,
Wayne
Photography by Design

[mrsrice22]

Stacey... THANK YOU!

I do have one question. When I filed for my sales tax, EIN and DBA the end of last year I believe I read somewhere online that they mail forms to you when it's time to file quarterly/annually (whatever schedule they put you on), is that still true or has that changed to us having to go online and automatically doing it? I'm on quarterly but it did say that it would be mailed weeks before it's due.

I'll look into this more tomorrow, I of course stumbled into this section before heading to bed at 2am. :)

EDIT: N/M - I called the Comptroller and they changed me from quarterly to annual and she did say that forms are normally mailed out the month before they're due (for any other newbs that were wondering).

[TootysMom]

Stacey - YOU.ROCK!

This is my first year working with an accountant and I'm so excited that you took the time to write this post. Now I have some extra questions that I'll have to ask my acct :) And, you answered one of the questions that's been bothering me for a while...setting up the savings acct as a tax escrow acct - that's perfect. Thanks so much!

Britney Voelkel

[MSooner]

Thank you! Thank you! You are my hero as I try and put this business together--I check out your Formspring often, too :)

[Tom]

Thanks, Stacy!