Introduction to Taxes for Artists
It is important that you understand how the IRS looks at an artist’s business. If you choose to hire an accountant, it is vital that she/he understands the tax code as it pertains to the arts. Many artists have been audited by the IRS because they were given bad advice by an accountant who was good at general tax information, but wasn’t knowledgeable about how tax law affects artists. Ask your fellow artists, nonprofit organizations, or your local Lawyers for the Arts for suggestions. (See also Business Licenses and Self-Employment chapters.)
This is a brief overview of tax preparation and is by no means an exhaustive be-all-end-all solution to your tax questions. Plenty of websites will give you more detailed information pertaining to your country and state, or you can contact your local government office.
In the United States, you will need to file both state and federal taxes, as well as 1099 forms. If you collect money for goods, you will need to charge and file sales taxes, which differ from state to state. You may also be required to charge and file city taxes. If you have employees, you will need to know the laws for handling employee taxes. If you are overwhelmed or uncertain, consult an arts accountant.
Most visual artists are considered “self-employed” in regards to filing their taxes. In a legal and taxpaying sense, this means that your “business” as an artist, and you as an individual taxpayer, are one and the same. There is no legal separation, such as one would have in a corporation, partnership, LLC, or other legal entity. The artist usually files a “Schedule C” as part of his or her regular 1040 income tax form, which is where you report your art income and expenses. The artist may file a form 8829 for the home office (studio) deduction and will also be required to pay self-employment tax (Schedule SE) on his or her net income (profit), as well as federal income tax. All these forms are part of the year-end 1040 income tax filing. As a self-employed artist, you will usually be required to pay estimated quarterly taxes using Form 1040-ES if your Federal tax liability is over $1,000 for the year.
For the IRS, deductible business expenses are:
Incurred in connection with your trade, business, or profession.
Must be “ordinary” and “necessary.”
Must “NOT be lavish or extravagant under the circumstances.”
Clearly, these guidelines are not an exact science. The artist has a large group of basic expenses that easily fit the above criteria: travel (hotel, meals, etc.), vehicle and transportation costs, equipment, art supplies, home studio expenses, legal and professional fees, gallery costs, and commissions, etc. Below are some of the more complex and contentious deduction areas.
Is Being An Artist a Business?
For tax purposes, to comply with the IRS, an artist must consider if their art practice is a business or a hobby. Artists often have financial losses—overhead exceeds the profit brought in by the sale of the artwork. When does the tax code determine an enterprise to be a business as opposed to a hobby?
Although you must claim the full amount of income you earn from your hobby, hobby-related expenses are generally deductible only to the extent of income produced by the activity. Therefore, if you do not generate any income from your hobby, you cannot claim any deductions. Furthermore, even those hobby expenses which can be deducted are subject to an additional limitation—they are considered miscellaneous itemized deductions on Schedule A, which are deductible only to the extent that they exceed 2% (at this writing) of your adjusted gross income. By contrast, if your activity can be classified as a bona fide business, you may be able to deduct the full amount of all your expenses by filing a Schedule C. In short, a hobby loss will not cut your overall tax bill because the tax law stipulates that you cannot use a hobby loss to offset other income.
As a business you can deduct a net loss from other income you earn, such as wages and salaries. How does the IRS determine whether your activity is a hobby or a for-profit business? The IRS outlines these nine criteria:
Whether you carry on the activity in a business-like manner.
Whether the time and effort you put into the activity indicate you intend to make it profitable.
Whether you are depending on income from the activity for your livelihood.
Whether your losses from the activity are due to circumstances beyond your control (or are normal in the start-up phase of your type of business).
Whether you change your methods of operation in an attempt to improve profitability.
Whether you have the knowledge needed to carry on the activity as a successful business.
Whether you were successful in making a profit in similar activities in the past.
Whether the activity makes a profit in some years, and how much profit it makes.
Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
The primary determinant is your ability to make a profit at what you are doing. If your efforts result in a profit in three-out-of-five consecutive years, your activity is presumed not to be a hobby by the IRS. You may have to prove to the government that you have made a genuine effort to earn a profit, so keep meticulous business-related records and conduct yourself in a business-like manner.
You need to keep track of the following expense items:
Office rental (whether at home or not)
Commissions or payment to managers or employees
Equipment used in your trade
Auto insurance and repairs
Supplies and materials
Special clothing or safety equipment for your work
Legal and accounting fees or services
Studio rent and expenses
Utilities, including phone/Internet
Entertainment and meals related to your business
Publications, periodicals, and other research materials
Fees for workshops and seminars
Membership or association dues
Shipping or mailing
Repairs or maintenance
You need to keep track of the following income items:
Proceeds from the sale of your work
Income from rented or leased work
Wages or salary paid for work as an artist, including honoraria, commissions, fees, and stipends
Grants, awards, and fellowship funds
Copyright royalties for published or distributed works
Advance payment for work to be completed in the future
You should have the following information for each item:
Reason for the income or expense/description
Check number, invoice, tracking number, or indication of other form of payment
Sales tax laws vary widely from state to state. Check the business section of your state’s website, or call the State Board of Equalization.
Out of State Sales
Every state has different laws for this. It depends on your type of business and how you process the sale. For sales tax information go to http://www.salestaxinstitute.com to find out details about your state and how it affects your business.
If your client is buying wholesale, and intends to resell your work, and she/he has a resale license, you do not charge him or her tax when you make the sale. If it is a retail buy, and she/he is not going to resell it, you are required collect the sales tax.
A resale permit is useful for artists in that it allows you to purchase items without being taxed, only if you use those materials in your production. Once you get a business license, you are eligible for applying for a resale permit. This permit allows you to sell work out of your studio and collect sales tax, but it also allows for the purchase of materials at a wholesale cost. This can save you a lot of money in the long run.
As long as the item or artwork in which you used the tax free materials is then sold, you can purchase tax free. If you purchase wholesale items that are for personal use, or do not go into the item you “make” directly, then you need to pay sales tax on those purchases.