The (Somewhat) Painless Tax Primer

Accountants simply love it when you come to their offices with a box of receipts and give them a clueless shoulder shrug when asked all-important business questions. Take it from Nate Reynolds, a CPA and owner of RUBIX accounting, who’s been helping photographers with bookkeeping, tax returns and cash flow management since 2010 (along with being co-owner with his wife of Turtle Pond Photography). “Taxes can be a scary topic,” he says. “But sometimes you have to take the information down with a little sugar.”

Here are ten sweet things to think about before you step into your accountant’s office or sit down to TurboTax this year.

Created by Gilad Sotil from the Noun Project

1. Do I need a separate bank account for my photography?
Um, yeah! Get one now. Reynolds likens doing taxes without a separate business account to walking through the mud versus walking on a paved road. “I won’t work with anyone who doesn’t have a separate bank account for business, because it’s a bad business practice,” he says. “Plus, the IRS frowns on the commingling of funds.”
Resource: The reallifeaccounting.com article “Commingling Items.”

2. What’s this LLC situation?
Photographers most often have three options: sole proprietorship, partnership or S-corp. “Some people get confused—there’s no LLC tax return, but there are tax returns for the three categories,” Reynolds explains. While most independent photographers will be under the sole proprietor category, Reynolds says obtaining an LLC is relatively inexpensive and protects you as an individual. “If you knock over a vase at a wedding, it won’t be you that’s liable, it will be your LLC that has its own insurance, bank account, etc.” Reynolds says. “The idea is it creates a wall between your personal assets and your business operations.”
Look at: nolo.com for LLC basics.

3. Do I need liability insurance?
Yes. Speaking of knocking over a vase, once your LLC is established, liability insurance is a necessity—not for the IRS, but to protect you against damages that occur on your company time. Not only can the lack of liability insurance be a deal-breaker with a client or venue, but, says Reynolds, “it’s definitely a deductible item come tax time.”
Check out: PPA’s liability insurance resource page.

4. I never get sick! Can I avoid health insurance?
Not this year! While we all know young photographers who’ve gone without health insurance for far too long, the Affordable Care Act says that health coverage is a must unless you want to pay a fee (see how much in the new rules, below).
Read up on: healthcare.gov/taxes to see how health insurance or lack thereof will affect you.

5. Can I give my clients a deal on sales tax?
Nope. Often innocently overlooked, charging tax on photography services is the law. The percentage and how it’s collected depends, however, on where you live. For instance, “in California, there’s no way to get around paying sales tax for every aspect of your photography business, from digital files to services,” says Reynolds. “Whereas in Indiana [where he lives], I can structure my invoice to show a service and an album separately, and in that case, part of it’s taxable, part of it’s not. I can also deliver images digitally and not collect sales tax.” Check your state’s website to see if tax is collected monthly, quarterly or yearly depending on how much you take in. Reynolds says sales tax doesn’t affect your tax return, but you will be fined if you’re not paying the state.
Check out: salestax.avalara.com for a fun tax calculator based on your location.

6. How do I make sure I’m not stiffing my employees (or getting stiffed if I am one)?
“When you have second shooters, assistants or people who do post-processing, you probably list them as independent contractors,” Reynolds says. But, depending on the relationship between you and the worker, “you may be risking a huge tax bill.” If those independent contractors are actually more like employees, “you need to pay taxes on all those wages,” says Reynolds, who admits the difference between an IC and an employee is nuanced—it depends on “behavior, financial control and the relationship between the two of you.” If you are a second shooter or assistant and you’re working for a set amount of hours per week, your employer may need to list you as an employee and therefore pay half of your FICA tax, among other taxes.
Resource: The irs.gov pdf “Independent Contractor or Employee?”

7. What’s the best way to organize spending?
Here’s where the fun comes in. Pour yourself a cup of coffee, open up your Quickbooks, ShootQ or Excel spreadsheet (we gave you ten software options last year) and summarize your buying and spending. Most likely, you’ve had a minimum system of recordkeeping, but your spreadsheet should have a column for spending by categories. Reynolds recommends separating things like advertising, office supplies, bank fees, prints and albums, communications (cellphone/Internet) and equipment purchases (two sections—miscellaneous camera accessories in one, and large purchases like computers, bodies and lenses in the other). “They’re treated differently when it comes to tax time,” Reynolds says.
Try: onereceipt.com to organize your receipts.

8. What should I expect to pay?
When you’re employed full time at a company, your Federal, social security and Medicare tax is taken out in each paycheck. But when you’re a freelance photographer—even part time—no employer is accounting for those taxes. Depending on your state, you’ll want to assume 25 to 30 percent of your income will be owed back to the state; you’ll need to either put it aside in a separate account, or pay it periodically throughout the year.
Resource: thebillfold.com has a great article about what to put away with an estimation table based on what you make.
Also: www.freelancetaxation.com/estimated-taxes-for-freelancers

9. What are some write-offs I can take?
This is where that lens cap, strap and printer you bought this year can pay you back. (Also, see common photographer write-offs below.) In addition to the traditional ones, Reynolds says 2013 changes in home office deduction rules now allow you to take a standard deduction rather than itemizing things like utilities, mortgage, housekeeper, etc. “Your vehicle is the same idea—you can keep track of all the aspects of gas, maintenance, etc., or you can do the standard mileage rate deduction,” says Reynolds.

10. What about my dependents?
“If you’ve had a child (and you’re the one who’s supposed to claim them), you just file them on your tax returns, and it’s definitely beneficial,” Reynolds says. “There’s no tax strategy involved.” The Child Tax Credit can be worth as much as $1,000 per child.
Consider: Marvin Gaye’s “Let’s Get It On” and thebump.com.

What can I deduct?
Funny you should ask. Here’s a list of common tax deductible expenses incurred by photographers to tick off. By Susan Lee, EA, CFP of Freelance Taxation.
• Books, magazines, reference material
• Business insurance
• Business meals and entertainment
• Cabs, subways, buses
• Equipment
• Film developing/processing
• Film supplies
• Gas and electric
• Internet/website
• Legal and professional fees
• Memberships (professional organizations)
• Messengers, private mail carriers, postage
• Mortgage interest/taxes
• Office supplies
• Promotion
• Props
• Software
• Staff fees
• Studio rent
• Studio supplies
• Stylists/makeup
• Tax preparation
• Telephone
• Travel

NEW RULES: Tax Changes in 2014-2015
Health Insurance Penalty
The Affordable Care act has made health insurance accessible for freelancers, but if you’ve failed to sign up in 2014, the tax hit is 1 percent of your household income or $95 per person—whichever is greater. In 2015, it goes up to 2 percent of total household income, or $325 per person, so enroll!

Personal Exemptions
You’re in the money, $50 more this year as the personal exemption rate (which reduces your taxable income) has increased from $3,900 in 2013 to $3,950 in 2014 and will be $4,000 in 2015. (Don’t spend it all in one place.)

Standard Deduction
This amount has also increased in 2014 to $6,200 if you’re single, or $12,400 if you’re married and filing jointly. Heads of households get $9,100 standard—cha-ching!

Related Links

The Entrepreneurs: Exploring the Business Opps of Photography

How to Harness Efficiency and Stay Organized

Take Control of Your Business: 10 Studio Management Software Programs