Here we will concentrate on Self Employment, Unemployment and Work for Hire and define them in more detail.
There are basically six types of business professionals:
Builder of businesses (entrepreneur)
Most artists are self-employed. The legal term for this is sole proprietorship. You and you alone own all the assets and assume all the liabilities of a sole proprietorship. A legal independent contractor is also a sole proprietor and you need a business license.
Good Questions for the Self-Employed
A place to live. Do you want your studio separate from your living space? Do you use toxic media in your work? Do you have other tenants or house mates to think about in this equation?
A place to do business. Do you have space for a home office? A home office allows you to deduct part of your rent or mortgage from your taxes. A home office is a place where you take care of the business side of your practice, where you generate work that you get paid for, send out packets and proposals, keep records, expense files, marketing tools, etc.
Communication devices. Do you need a telephone, smartphone, email, and computer? Do you need or want a business listing in your local phone book or online directory? Do you need an answering service or call waiting?
Transportation. Will you need a car or can you rely on public transportation, and rent a car or truck when needed?
Health insurance. Do you have adequate health insurance? Can you afford NOT to have health insurance? (See the Insurance section.) With changes in the Affordable Care Act in 2013, artists can get health insurance along with the rest of the public.
The self-employed are required to pay unemployment insurance for themselves and their employees. The money is collected through the Employment Development Department (EDD).
The self-employed artist needs to plan for retirement right from the start. Do not wait until you are older to worry about this. Setting aside even a small amount per month adds up.
Balancing your checkbook is a necessary part of being self-employed. “Mind banking” (keeping it all in your head) does not work. Consider investing in an accounting program like Quickbooks, to help keep your accounts in order and simplify tax preparation.
Create a spending plan or budget for your business. Keeping track of how and when money goes in and out of your account is vital.
Keep records. Know how your business is doing and be able to report it accurately to the Internal Revenue Service (IRS). Whether you do your taxes yourself or not, you need to set up a good system for keeping receipts and payment records. A shoebox in the bottom drawer or your desk is OK for the short-term, but do not let them sit there until the end of the year. Organize your receipts on a regular basis, quarterly at the very least. Group them into business expenses that correlate with your expenses on your taxes. A computer program like Quickbooks will help you do this.
Most cities require sole proprietorships to register for a business license.
Artists often wonder if they qualify for unemployment benefits. Unemployment insurance provides an income to workers who have been laid off, seasonally let go, or terminated without cause by an employer. Employers pay a separate tax, which the State Department of Labor uses to pay such benefits. Unemployment insurance is a universal entitlement to those who qualify—even for artists who work seasonally or part-time. However, many artists who are self-employed or work freelance may not qualify for unemployment benefits.
One of the most common exclusions for artists pertains to the Schedule C tax form. An artist who operates a business or profession as a sole proprietor, independent contractor or consultant, or as a partner in a partnership, may need to report resulting income on a Schedule C tax form. Many artists file these forms for sales of their artwork, commissions, and workshops, just to name a few examples. The tax deductions artists take as businesses or sole proprietors may preclude them from unemployment benefits because they are deemed “not totally unemployed,” as indicated by reported income. Unfortunately, it is possible that an artist who brings in a modest amount of additional, untaxed income on a Schedule C may be treated as if her/his entire living is made as a freelance sole proprietor.
Another serious problem artists may have with unemployment benefits is the possibility of irrecoverable overpayments. The Department of Labor may determine at any time during a recipient’s collection of benefits that she/he was not entitled to them because of other earnings. This is where things get complicated for artists. Certain types of promotion of artwork, such as a website encouraging sales, may be perceived as possible sources of income and could lead to potential exclusions for unemployment benefits. Before you panic, however, it should be noted that if the agency is responsible for overpayment due to a fault in its system or incorrect computing of benefits, the agency deems these “non-recoverable,” and the claimant is not liable for return of the payment. In any event, it is best to give all the information the unemployment board asks for, and give it honestly. Return of benefits may take place if the Department of Labor believes that the individual lied or withheld information in her/his unemployment insurance application. It is extremely important to do your homework before you apply so that you do not end up in this situation.
Works for Hire
It is important to understand the difference between works for hire and other working situations.
Legally, a work for hire is 1) a work prepared by an employee within the scope of his or her employment, or 2) a work specially ordered or commissioned for use as follows:
Contribution to a collective work
Part of a motion picture or other audio visual work
Answer materials for a test
The U.S. Copyright law states:
Furthermore, if the parties expressly agree to the terms in a written and signed instrument, works for hire may also include original works of authorship fixed in any tangible medium or expression, now known or later developed, from which they can be perceived, recorded, or otherwise communicated, either directly or with the aid or machine or device.
Works of authorship include the following categories:
Musical works, including any accompanying words
Dramatic works, including any accompanying music
Pantomimes and choreographic works
Pictorial, graphic, and sculptural works
Motion pictures and other audio visual works
Sounds recordings and architectural works.
What is not a work for hire:
Non-copyrightable matter; e.g., inventions, ideas, utilitarian works, procedures, processes, systems, models of operation, concepts, principles, discoveries, facts, U.S. governmental works, works not lawfully obtained, works not original to employee, works in the public domain (i.e., not protected by copyright), obscene works, unoriginal works, works created by employees outside the scope of his or her employment titles, names, works, short phrases.
It is important to clarify all work for hire issues if you hire employees, or if you work for someone else.
You can also get our popular book for artists which includes all of this information and more here.