Whether you’re a long-established photographic entrepreneur or just taking your first steps into business ownership, the U.S. tax code presents a maze of pitfalls. But if you’re resourceful and well-advised, it offers opportunities as well.
To help navigate this thicket, we turned to a pair of photographers and accountants, Kim Crouch and Brandon Scott, for some helpful tips.
1. Seek professional help, especially if you’re growing.
Seriously, this stuff is confusing. If you don’t have experience with tax filing, you’re liable to make mistakes, which could result in some uncomfortable encounters with the IRS. This goes double if your business has grown to the point where you’re considering hiring an employee. “Federal and state officials pay very, very close attention to payroll matters,” Crouch says.
Scott agrees. “A full-time employee is a major expense and bookkeeping obligation…time tracking matters, paying payroll taxes on time matters, paying the employee on time matters.”
Fortunately, payroll services that can tackle these matters aren’t super expensive for most business owners, Crouch says. Her service of choice, Gusto, starts at $39 per month with a $6/month charge for every employee you have.
2. An LLC for thee.
If a photographer owns a lot of high-value personal assets, like a house or really expensive car, it makes sense to explore incorporating your photo business as an LLC or S-Corp, Scott says. This way, you build a firewall between your personal and business assets in the event Bridezilla’s lawyer comes a’knocking. “On the other hand, if you don’t have a lot of high-value personal assets and you’re just starting out, I’d generally recommend operating as a sole proprietor,” Scott says, since there’s no paperwork or lawyers needed.
For her part, Crouch suggests starting with the simplest option that makes sense for you and discussing whether or not setting up a separate entity is a good option from a tax and legal perspective, with professional advisors.
3. Pay your taxes quarterly.
One common mistake Scott sees photographers make is not paying their taxes quarterly. “This isn’t illegal at all, you can pay one giant sum at the end of the year,” he says, but there are benefits to breaking it up into quarterly chunks. For one thing, the IRS will ding you for interest and penalties if you choose to pay annually as opposed to quarterly. Second, “it’s easy to accidentally live life as if you’re making way more than you truly are,” Scott says. Come year’s end, you could have spent through the money that should be going to the government.
4. Restraint > Loans > Credit Cards.
“A common financial mistake I see is when new photographers place a huge priority on gear. I’ve met photographers who book a single wedding and the very next day charge up their credit cards with thousands of dollars’ worth of bodies and lenses,” Scott says. It’s not only irresponsible, he adds, but beside the point. “Clients will seldom hire you for the gear you have. Do you take amazing photographs? That’s what matters most.”
If you really can’t live without a given piece of pricey gear, Crouch advises using cash flow from operations to fund equipment purchases, and renting until you can afford to buy. If you decide to use debt, she suggests getting an actual loan (not a line of credit) that amortizes over the expected lifetime of the equipment you’re buying. So, for example, if you want to buy a high-end camera body, take out a five-year loan. Crouch and Scott are unanimous on what you should not do—finance any business purchase with credit card debt.
5. Editing at home doesn’t make your house a home office.
The IRS only permits home office deductions if your home is the principle place you do your business. If you bring work home, that doesn’t suddenly transform your broadband bill or guest room with a desk in it into a business expense.
6. Don’t forget sales tax.
Crouch says sales tax is another minefield for photographers. Each state has its own rules, but regardless, “photographers who do business in a state with sales tax license need a sales tax license from the state department of revenue in place on day one,” she says.
Sales tax is tricky because not every state treats the sale of intangible digital goods, like digital photos, the same way. Some states, like California, won’t require sales tax when you sell a digital file but would expect you to charge sales tax if you sold a digital file with a physical print, Crouch says. There are even greyer areas here, too: you could sell a digital file and then six months later, sell a physical print of the same image and could potentially be on the hook for sales tax for both the print and the earlier sale of the digital file. The best way to sort through the vagaries of your state’s sales tax rules is by referring to tip one.
7. Don’t take the L.
If you’re still getting your photo business on its feet, it may be tempting to write down your business expenses until you take a loss. But do this for several years in a row and you may trigger the so-called “hobby loss rules,” which doesn’t permit you to deduct losses on hobbies against other income, Crouch says. You can show zero profit for a few years, she says, but consistently filing at a loss is going to raise eyebrows you’d prefer to remain level.
8. Clothes aren’t business expenses.
That nice suit or dress you bought to shoot a wedding? Sorry, it’s not deductible, Crouch says. Only clothing that has no other use but for business (like a doctor’s scrubs) is considered a business expense.
9. When it comes to saving for retirement, heed Nike: Just do it.
“It’s so important in general but becomes even more important when you’re self-employed,” Scott says. There are multiple tax-friendly vehicles for self-employed individuals to squirrel away savings. An SEP IRA is one such vehicle worth exploring, Crouch says. An SEP IRA lets you invest 20 percent of your earnings or up to $55,000 a year into a retirement account. Your SEP IRA’s gains will be taxed when you withdraw from the fund upon retirement but the amount you invest in an SEP in a given year will be pre-tax, so it will lower your taxable income.
10. W-9 first, pay second.
If you’re looking to hire a second shooter or other freelancers like editors for some sporadic jobs, Crouch says you should get their W-9 tax form in hand before you send them any payments. You can pay a freelancer without first collecting a W-9, but you’ll need their signed W-9 to issue those freelancers a 1099 form at the end of the year when you go to claim those payments as write offs. As a business owner, you need to issue a 1099 to any unincorporated entity (e.g., an individual) you’ve paid $600 or more for services (not products) during the year. An LLC may file as a corporation, a sole proprietorship, or a partnership, so it’s important to have the signed W-9 from these vendors so that you have proof regarding whether or not a 1099 is required to be sent by you. It’s wise to have a W-9 on file so that you have proof in case you’re ever audited.
Tax Changes You Should Know
With the passage of 2017’s Tax Cut and Jobs Act, the U.S. tax code has undergone several major changes—some beneficial to small business owners and sole proprietors, and others not so much. We covered those changes in greater depth last year (Rf March, 2018) but here are some highlights for the 2019 tax year.
• Sole proprietors, LLCs and S-Corps that file as sole proprietors will receive a 20 percent “pass through” deduction that reduces gross income.
• You will no longer pay a tax penalty if you don’t carry health insurance.
• You can’t claim entertainment as a business expense but you can still claim a 50 percent deduction on meals and drinks.
• Certain business assets can be expensed at 100 percent in the year they’re purchased vs. expensing them via depreciation over time.
Kim Crouch is a photographer and a CPA based in Kitty Hawk, North Carolina.
Brandon Scott is a wedding photographer based in Monterey, California.
Note: None of these tips are meant to substitute for the tax or legal advice you’d receive from a professional. Contact your own accountant before implementing any of these tips.