The photography tax man cometh! Okay, there’s not really a photography tax…the same dude takes all our taxes. But the end is near! Well, you’re almost out of time to pay your taxes, anyway.
In a previous post, I touched on some tax considerations for photographers. Now I want to give you a working illustration and a quick and easy way to give Uncle Same his due.
As always, please remember I am not an accountant. I sought help from a certified public accountant and I suggest you do the same; especially if you’re just starting out.
So here’s my deal: I have enough coin to buy that shiny new 5D MKIII. Sweet, huh? Not so fast. I’ll have to work a little harder and wait a little longer. You see, I owe taxes on everything I’ve made this quarter. I add up all my profits, subtract my expenses and calculate 38.3% of that to come up with my estimated tax payment for the first quarter of 2012. Keep in mind that not all expenses can be taken at 100%. The IRS calculates depreciation for equipment. But that’s why it’s called an estimated payment. I may end up owing the government more money at the end of the year, or I might get money back. Read the previous post to find out why it’s 38.3% for me. Your mileage may vary.
Taxes are due April 15, June 15, September 15 and January 15. This year April 15 falls on a Sunday, so we get an extra day. The fastest way to pre-pay your estimated tax is to go to www.eftps.gov. Click the “enrollment” link and follow the registration instructions. Basically, you enter some personal info (social security, address, etc.) and link a bank account. You then request a PIN which comes to you in the mail within 7 days. Use that PIN to complete the registration and you’re all set.
Why pre-pay my taxes every quarter? ‘Cause I don’t want to get hit with a big tax bill at the end of the year. I would rather pay it in chunks throughout the year. I know it’s not fun, but I don’t imagine getting audited is fun either! And hey, maybe next quarter I’ll be able to deduct that 5D MKIII!
So you want to be a professional photographer? You’ve got a camera, a website with some galleries and you’ve even earned a few bucks on the side for your work. You have the passion, now you have a taste for the business. So it’s time to quit the 9-to-5, right? Not so fast. There’s a lot you need to think about first. Sure you can take money under the table, but if you want to be legit, if you want people to take you seriously as a professional then you have to take certain steps.
The first question a lot of beginning photographers struggle with is, how much to charge. There are quite a few sources to turn to for help with this question, but I’m going to save that for a later post.
Before you start charging people, you need to set up your business. The example I am about to provide is for my specific case in my state (Florida). I am not an accountant or attorney, so use this as a guide.
First, you have to decide if you want to operate as a sole proprietor or a corporation. Don’t tell Mitt Romney, but corporations are not people (more on that in a moment). As a sole proprietor you just run your business and pay taxes. A Limited Liability Corporation, as the name implies, gives you protection against debt and lawsuits. If you are a sole proprietor and the business goes bust or you get sued, your personal assets are at stake. Do you really want to lose your car, house and life savings because your photography business didn’t make it? As an LLC, debts and lawsuits are limited to the corporation and not your personal assets. In Florida, it costs $125 to register an LLC and $140 a year to file annual reports.
Speaking of lawsuits, you can buy commercial liability insurance and “errors and omissions” insurance. The first, protects you if someone gets hurt or property is damaged while you’re on a shoot. The latter is bridezilla insurance. Or in the case of one New York studio, a divorced man who wants tens-of-thousands of dollars to re-create his wedding. You can learn more about insurance for photographers from the PPA and ASMP. I got a quote from a company offering a 1-million dollar liability policy, $15,000 in equipment insurance and $25,000 errors and omission protection. The quote was for $625 a year.
Next, you have to get an Employer Identification Number (EIN) from the IRS. This is just a number the IRS uses to identify a business. If you get a W-2 from your employer, you should see the EIN number on the form.
Now you’re ready to pay taxes quarterly! Yay! Depending on how much you made and spent on business expenses, you have to estimate how much taxes you owe and send a payment every quarter. Since you work for yourself, you owe self employment tax. The current rate is
13.3% 15.3%. [UPDATE: Remember the fiscal cliff deal at the end of 2012? Well the 2% holiday on social security deductions went away. So as of Jan. 2013, the rate goes back to 15.3%]
Just like your wages are deducted for social security and medicare, the SE tax deducts
10.4% for social security [now 12.4%] and 2.9% for medicare. Then there’s income tax. Whatever your tax bracket is gets added to the self employment tax. So in my case, I’m paying 38.3% in tax: 13.3% for self-employment and 25% for income tax. [now 40.3% in tax]
There are, of course, deductions you can take. I pay for my own health insurance, so I can deduct that. If you bought a new lens or camera, that’s a deduction. You can even claim mileage at 55-and-half cents a mile.
[UPDATE 2/7/11]: Check out this post on special tax advice for photographers.
Let’s add it up so far: $125 for the LLC, $625 for insurance and 40% of everything I earn (after legitimate deductions) goes to taxes. Still think you can charge $100 for a photo shoot?
I’ll get more into pricing in the next post. For now I want to leave you with some resources. Check out Photoshelter’s Vimeo page for great videos with the “Tax Ninja” on taxes for photographers and three good videos with John Harrington. Harrington, of course, is the author of “Best Business Practices for Photographers” and the Photo Business blog. I’ll leave you with a video on the “7 Common Tax Mistakes Made by Photographers”.