Are you in compliance with United States Tax Laws? Are you even aware what to look for? Let us help you with this informative guide.
Disclaimer: This guide is written based on United States tax law. Laws may vary from state to state as not all state tax laws are based on federal tax laws. This article is meant to serve as an informational guide. United States readers should consult with a registered tax return preparer to obtain tax and accounting advice. International readers should consult with their local tax authority for clarification on tax laws.
Hobby vs. Business
The first important consideration when deciding how to organize your documents for tax time is: Are you a hobby or a business? The Internal Revenue Service defines the difference by declaring a business has a “profit motive.” The IRS allows you to make the determination for yourself. However, they will consider making the choice for you if you are claiming business deductions on your taxes and are not turning a profit in at least three of the prior five tax years.
As a photographer, when deciding whether you are running a business or have a hobby for tax purposes, ask yourself some questions.
- Am I devoting a substantial amount of time to my work? Occasionally photographing family functions and selling your prints may not convince the IRS you have a profit motive.
- Am I knowledgeable enough to run a successful business? Running a photography business does not solely revolve around knowledge of a camera and editing software. If you are not knowledgeable about aspects of a photography business, you are less likely to pull in profit and more likely to be considered a hobby.
- Am I improving my methods of operation so I can profit? This is very relevant to the photography business. Photography is always advancing. New equipment comes out, new products come out, new styles become popular, prices change. If you aren’t keeping up, you may be losing business to photographers that are keeping up, which may put a strain on your profit.
For further reading on hobby vs. business, refer to IRS article: http://www.irs.gov/irs/article/0,,id=186056,00.html
State laws that cover income tax, corporate tax, and sales tax may vary depending on the state. Some states may require photographers to withhold sales tax on prints and products only, while other states may require photographers to withhold sales tax on digital transfers. Some states require a license for photographers to operate while others may not. Before you file taxes for your business, make sure you are complying with your state laws. If you have trouble understanding the laws of the state, many states have Small Business/Corporate tax hotlines that allow you to speak with someone that can explain your responsibilities. You also may wish to contact an tax attorney.
Income and Expenses
According to the U.S. Tax Code, we must report all income, unless it is specified to be nontaxable, and we are expected (and in some cases required) to take deductions for reasonable business expenses. How do we ensure we are following these rules? Start with keeping all receipts. Keep a log of your jobs and the income you receive for them. Many photographers use software to manage their income and expenses.
In all United States businesses, expenses listed on tax returns must be “ordinary and necessary.” You must remember to separate your business expenses from your personal expenses. You can deduct prints you order from a lab to provide a client but you cannot deduct prints you order from a lab for your personal use. If possible, try to make business purchases and personal purchases separately. Most business owners find it helpful to get a separate business checking account and credit card. If you make purchases together, put a note with that receipt reminding yourself that part of the purchase was personal.
We are all excited when we purchase a new camera or lens or computer. It’s something new to learn, experiment with, work with, and a big deduction for that year, right? Not necessarily. Any asset you purchase for your business that is expected to last more than one year is “depreciable.” The full cost is not regularly deducted that year. Instead, the asset is assigned a “class life” and the cost is recovered over the course of the life.
Let’s use a computer for an example. You just bought that $1,500 computer since your old computer was not keeping up with your editing speed. A computer has a 5-year class life. The $1,500 is actually deducted over six years, using percentages from depreciation tables.
Does anyone really expect to own a computer for five years before the need for technology upgrades kick in? There are different options when you are depreciating assets. Some assets may be eligible for different types of depreciation. Talk to a registered tax return preparer, preferably one who has experience in business, to find out the different options pertaining to depreciation. Do keep in mind, once you begin to depreciate an asset, you may be subject to tax on selling a business asset if it is sold.
Listed Property and Maintaining Records
One tax law that is extremely important to photographers: Photographic equipment and computers are considered “listed property” and are subject to special rules and limits. Why? Listed property is property that has potential to be used for business purposes and personal purposes.
If you purchase equipment that is deemed as listed property, part of your requirement in order to use it as a business expense is keeping records. This probably does not sound like fun to anyone. Who needs another record to keep up with? It may prove vital if the business use of your equipment is ever questioned.
How should you maintain a record? One simple solution is to make a spreadsheet listing all of your equipment, piece by piece, and each occasion you used any of the equipment. Include the time you spent using the equipment and the number of shots taken. Check off which equipment was used on that particular occasion. For substantial proof of use, load those digital negatives on DVDs, label them, and keep them with your records. You will be happy you did.
Business Use of Home
How many photography businesses operate out of an area in the owner’s home? There are perks to those photographers that have opted out of renting a separate office space for their work. If you are working out of your home, you may be entitled to claim business use of home. This is available to renters and homeowners.
How do you know if you can claim business use of your home? In order to have an in-home office or work area, darkroom or studio, that meets tax requirements, the office space must be used regularly and exclusively for business purposes. You’ll need to know the square footage of your office space and the square footage of the total living area in order to determine your business use percentage.
Okay, you have a business area set up. What can you deduct? There are direct and indirect expenses when you have business use of home. Direct are expenses that apply to the work space only. Did you paint that room so your editing could be completed accurately? If the room was the only room you painted, you have a direct expense, which is fully deductible.
Indirect expenses are expenses that applied to the entire living area. Rent or mortgage interest may be used. Utilities may be used. Tenant or homeowner’s insurance may be used. Indirect expenses are multiplied by business percentage to calculate the deductible portion. To clarify, if your business space accounts for 15% of your total living space, you pay $1,000 a month for rent, $150 per month is deductible for each month you have the business area.
Let’s look at paying taxes. Your business made $15,000 this year after expenses. [Note: This applies to sole proprietor photographers, not corporations.] Now, you have a self-employment tax of $1,842. Why do you have to pay all this additional money at the end of the year just because you are self-employed?
Self-employment tax is the employee and employer’s portions of Social Security and Medicare taxes. When you are an employee, your employer withholds your share and pays their share of those taxes. When you are self-employed, there is no one to withhold taxes or pay the employer’s share. It becomes your responsibility to pay the entire amount of Social Security and Medicare taxes.
How can you avoid having to pay taxes in a lump sum at the end of the year? Make estimated tax payments. These payments are made four times a year. They are a convenient way of paying taxes with an income that can be flexible. When self-employment taxes increase as a business grows, many business owners consider the benefits of incorporation.
Tax Tips Specific to Photographers
Some additional tips on expenses that might help your business:
- Sponsor a dance group, sports team, or other organization that will put your business name out there for others. It is an advertising expense!
- If you pay someone to assist you for a project, the amount you pay them may be a contract labor expense. This does not include amounts paid to regular employees. You may be required to issue a 1099 form to any individual you pay $600 or more in one year.
- If you pay for insurance to protect your equipment or business investment, these expenses are deductible.
- Buying or renting a studio or office space is a business expense.
- Attorney and accounting fees for your business are business expenses.
- Don’t forget to keep the receipts for paper you use for contracts and business documents! Include the costs of blank CDs for digital transfers, printer ink if you print your client’s images, postage for shipping products, and any other office related expenses you have for your business.
- Photographers have equipment repaired and maintained! Save those receipts. If you don’t keep your equipment in good condition, you can’t produce income. It’s an important expense!
- Here is where you include your props, your spare batteries, your memory cards, your carrying bags, your backdrops, your MCP Actions, and other editing tools.
- If you are required to have a business license, you are allowed to deduct the cost of the license.
- Keep mileage logs while driving between business destinations. Vehicle expenses are best supported by mileage logs. Mileage logs should contain the date, distance, and purpose of the trip in the very least.
- For the destination photographer, keep your receipts for the following expenses while away from home: airfare, car rentals/taxis/public transportation, meals, lodging, laundry, and business calls.
- Self-employed retirement plans are deducted from your total income.
- Self-employed health insurance, if you are not eligible to be covered under other health insurance policies, are deducted from your total income.
- Education. Photographers are always learning. Education expenses that improve the quality of your work and incurred with a motive of increasing your profit are expenses. Therefore, MCP’s Online Training seminars may be used as business expenses.
- Last but not least, there are many people who receive tax advice from people that are not qualified to give tax advice. Before relying on anyone else’s advice, check with someone that thoroughly understands tax laws that pertain to your business to keep your business safe.
An excellent guide on Small Business Federal Tax Responsibilities can be found at: http://www.irs.gov/pub/irs-pdf/p4591.pdf.
This post was written by Ryne Galiszewski-Edwards, owner of Fall In Love With Me Today Photography. Ryne operates her photography business with her husband, Justin. She is also a seasoned tax advisor with Small Business Certification and an instructor of various tax courses.