Tax Tips for Creative Professionals
For some self-employed creative professionals (or part-time “moonlighting” creatives), tax season can be the equivalent of a nightmare…especially if they haven’t kept their accounting documentation and tax receipts up-to-date and organized throughout the year, but much like any serious project—creative or otherwise—once you master a few key techniques you are more likely to enjoy (or at least have a higher tolerance for) the process. With this in mind, the tax experts at CPA for Freelancers® offer these tips:
Be Proactive. Even though Tax Day is a few days later this year (April 18, to be exact), there are several reasons to file your taxes as soon as you can, especially if you are owed a refund. At the beginning of the season, the volume of tax returns going into the IRS is lower, so they can turn around refunds more quickly. The same is true for tax professionals: The closer it gets to April 18, the busier CPAs get, so set and appointment and keep it. Even if you owe taxes, you can file early and not pay until April 18.
Know your geographic tax obligations. The most common place for newly self-employed individuals to overlook their tax obligations is at the local tax level. Business owners need to know what taxes they may be responsible for in the city where they are conducting business. This information can usually be found on the website of the city where a freelance business is based or by engaging a local CPA firm to help in the business start-up phase. A tax professional will be able to advise on geographic-specific tax considerations that may not be apparent to those outside the tax profession.
Sort receipts before you go. Don’t walk into your tax appointment with a shoe box of crumpled receipts and expect fast service. If you keep your business records organized throughout the year, they will be much easier to go through come tax time, which can help you avoid errors and missed business expenses.
Don’t forget—you can file an extension. If you don’t have all of your tax documents and the calendar says April 18 is coming, you still need to let the IRS know you intend to file. Your CPA can get an automatic extension of six months to file your taxes, but you still need to pay your estimated tax debt by April 18 or you will face fines.
Own up to any tax indiscretions. Your tax preparer can only file a return based on the facts and documents you provide. He or she doesn’t want you to guess about expenses or income, and lying about those details is a surefire way to get in serious trouble with the IRS.
Explore your entity options. If you are a self-employed creative, or are considering starting your own business, tax season is a good time to ask your tax advisor what entity type would be most advantageous for you. For example:
A sole proprietorship is the simplest form of entity in terms of set-up and tax payments. As a sole proprietor you are responsible for claiming the profit and loss of the business as your income. You also must pay self-employment taxes. The drawback of a sole proprietorship is that the individual is personally liable for any damages or credit issues that arise from their business operations.
A corporation is an entity which is separate from its owner. The corporation is formed under the laws of the state in which it is operating, with Articles of Incorporation. Choosing to establish a business as a corporation limits the liability of the individuals participating in it and, from a branding perspective, it may also provide additional credibility to the business.
A subchapter-s corporation (or s-corp) is a corporation and the owners are considered employees. The entity is required to pay these employees a reasonable salary. Profit or losses of the entity flow through to the individual shareholders. Any salary paid is subject to traditional employer and employee payroll taxes. The remaining profit flows through to individual shareholders and, while subject to income tax, is not subject to payroll taxes and is considered passive income. In order to maximize the tax benefit of an s-corp, owners must find the balance between wages and profit distribution.
A limited liability company (LLC) is not a corporation, but it has the liability protection of a corporation. Single-member LLC entities pay tax like a sole proprietorship. Multiple-member LLCs can also be formed which pay taxes like a partnership.
Look past Tax Day. Once your taxes are filed, resist the temptation to stuff your tax receipts and other supporting documents in a drawer and forget about taxes until next year. Instead, set a calendar reminder to make a tax planning appointment later in the year with your CPA.
While it may not be as much fun as your next creative project, spending a little time upfront organizing your tax documentation and engaging the help of a good tax preparer who understands your needs as a self-employed or freelance creative is time well spent. Doing so will give you more control over the tax filing process, expedite any tax refund you are owed and create a tax situation that more closely resembles a masterpiece than a menagerie of messy (and potentially costly) taxation issues.
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com which also features a blog, how-to articles, and a comprehensive freelance tax guide.
