1. Do I need an accountant?
If you are able to do your bookkeeping and file your tax returns yourself, then you probably do not need an accountant. Once your business becomes more complicated or more time-consuming, then it is probably advisable to hire an accountant and a bookkeeper. It is also advisable to hire a qualified professional such as an accountant or an attorney during the initial setup of your organization. Both professionals will be able to clarify questions and help with the choice of the most appropriate business entity.
2. How do I document paying myself?
This depends on whether or not you are an employee of a corporation or a sole proprietor. If you are an employee, then quarterly and annual payroll tax returns are filed with the government. Quarterly returns such as Form 941 and various state and local forms are due the month following the end of the quarter, and annual returns such as Form 940 and Form W-2 are due in January. If you are a sole proprietor and reporting income on Schedule C of your Federal 1040, then you pay self-employment tax when filing your Form 1040, and you pay tax on the profits of your business. As a sole proprietor, you are required to make quarterly payments for the amount of tax estimated to be owed for the year. Quarterly estimate payments are due April 15, June 15, September 15 and January 15 of the following year.
3. What are the differences between being incorporated and a sub-chapter S?
A sub-chapter S is a type of corporation. One main difference is that with a sub-chapter S corporation, the profits and losses flow through to shareholders and are reported on their personal tax returns. As a C corporation, the corporation reports all profits and losses and pays the related taxes on the profits. There are numerous differences between the two entities. There are also other entity types available to choose from. It is usually advisable to seek the advice of a qualified professional during this initial setup phase of your organization.
4. Is it better to be a sole proprietor or to be incorporated?
The answer to this question depends on the individual taxpayer. In some cases, it may be better to be a sole proprietor, and in other cases it may make more sense to incorporate. One main difference between the two types of entities is liability exposure. It is usually advisable to seek the advice of a qualified professional during this initial setup phase of your organization.
5. If I'm a sole proprietor and have an assistant, do I need to set up an account for payroll deductions?
You would set up payroll tax expense accounts for the employer's share of social security, Federal and State unemployment taxes. Any withheld taxes from your assistant's payroll would be recorded as a liability and remitted to the government either quarterly or annually with required payroll tax returns.
6. Should I claim sales of my artwork as income on my taxes? At what point does this become necessary? What if I am working another job and also selling my work on the side?
Any cash collected from the sale of artwork and any income earned from your full-time or part-time employment would be reported as income on your tax return.
7. What tax forms do I need if I am making an income from my work? What are the tax benefits of being an independent contractor?
The list of tax forms will vary depending on the individual. Some forms that will be used will be Form 1040, Schedule A, Schedule C, Schedule SE and others, depending on the individual taxpayer. There are tax benefits associated with being an independent contractor such as the self employed health insurance deduction, but there are also downsides such as the inability to collect unemployment benefits. It is important to note that the IRS closely scrutinizes the activities of an independent contractor vs. an employee status. As previously mentioned, the type of business entity initially chosen should be discussed with a qualified professional.
8. How does independent contractor status and unemployment work together? If I am not selling work, am I eligible for unmployment benefits?
An independent contractor is not eligible to collect unemployment benefits. As an independent contractor, there is no way to be laid off by an employer, since the independent contractor is the employer. Lack of sales of artwork does not constitute unemployment. Employees are eligible for unemployment benefits if laid off by their employer.
9. How do taxes work for grants, scholarships, etc. (i.e., monies obtained to do artwork)?
Generally, the grant or scholarship received would be taxable. In most cases it makes sense to check with the grantor about the tax treatment of the grant, which should be outlined in the grant document. Scholarships are tax-free only if they are to a candidate for degree for payment of tuition, fees, books, supplies and equipment.
10. How do commissions work in terms of taxes? For example, if I sell my work in a gallery and the gallery takes a commission, do I claim taxes on the whole price or just my cut?
The whole amount would be reported as income and the commission amount would be deducted as an expense on your tax return
11. If I have a studio in my home, and I am paying a mortgage on the house at the same time, how does this affect my taxes? How can I deduct for the space I use as my studio/office at home?
The amount of mortgage attributable to the business part of your home (i.e., the studio) would be deductible as a business expense on Form 8829. The space used as a studio/office at home would be determined by dividing the square footage exclusively used for business by the total square footage of the home. The use of your home for business must be exclusive, regular and for your trade or business. It also must be one of the following: your principal place of business, a place where you meet with clients or a separate structure.
12. Can you give me a list of deductible expenses I should keep track of as an independent contractor?
All ordinary and necessary business expenses associated with the generation of income should be kept track of for the determination of taxable income. Some expenses to note include supplies, travel, insurance (including health), business use of auto and home. This list is different for each individual and business. Personal expenses are not deductible as business expenses.
13. How much of my tools/supplies are deductible?
Tools and supplies that are ordinary and necessary for your business would be a deductible. If they are significant in nature though, they may be capitalized or inventoried depending on their use.
14. What kind of entertainment expenses are legitimate write-offs?
Business-related entertainment expenses must be directly related to or associated with the active conduct of the business, and only 50% of the expense is deductible. Types of entertainment expenses would include entertaining at social events, sporting events, and theaters.
15. If I travel to shows frequently, how should I deduct my travel expenses?
Travel expenses are ordinary and necessary expenses associated with traveling away from home for business. The travel expense would be deducted either as an expense on your corporate tax return or on Schedule C. Travel expenses are not limited to 50% and they include your travel, transportation and lodging. Travel expenses that are non-business related are not deductible.
16. What information do I need to have on a sales receipt that I write for my own work to make it "legal"?
A "legal" invoice would include an invoice number, date, description of work performed, and name and address of buyer and seller. A trip to any office supply store would provide adequate sales receipts for use in recording sales.
17. What are estate taxes and how are they affected by a work which is left behind after an artist's death?
Estate taxes are paid by your estate after your death. The tax is based upon the entire value of your estate, including your artwork and personal assets such as your home and investments. This is a very complex and changing area, and planning should be done with a qualified professional. Generally, if the total value of your assets, including business assets, exceeds $675,000, you could be subject to Federal estate tax.