Many local photographers have been asking me to compile a blog series that not only teaches them how to acquire a better customer base, marketing ideas and more importantly the business side of photography.
As creatives for many of us, this aspect of our business can be daunting. I've asked my accountant and long time friend Randee Tuepker Lindholm, CPA to help me answer some of the various questions that I've been hearing.
1. Do I need to register my photography business with the state for tax purposes? How and why should I do this?
Registering with the state:
Depending on the filing status of your business (i.e. sole proprietor, LLC, corporation) filing with the state may or may not be necessary. You are required to file paperwork with the Secretary of State if you have a filing status other than a sole proprietorship. Sole proprietors may want to file DBA paperwork with the Secretary of State if the proprietor wants to use a business name other than their given name.
State of Vermont: Businesses may also be required to register with the VT Department of Taxes and obtain a VT tax ID number. All entities need to register with the tax department but sole proprietors only need to register if they have employees or need to remit sales and use tax.
2. What’s the best business format for my photography business, DBA, Sole Proprietor, LLC or Inc. What’re the tax advantages to each of them.
The best format for a business depends on the taxpayer. Sole proprietor is the simplest format and many taxpayers are happy sticking with this. A sole proprietor puts all income and expenses on their personal return (no separate return is filed). The profits from the business are subject to both regular income tax and self-employment tax which is 15.3% of earnings. Regular income taxes depend upon the other income and expenses on your return.
LLCs are not a taxable entity. LLCs are legal entities and can be taxed however the taxpayer chooses.
There are two types of corporations, C-Corporations and S-Corporations. C-Corporations are going by the wayside now due to double taxation so if you are considering becoming a C-Corporation make sure you do your research first and speak to a tax professional.
S-Corporations are extremely popular but the business income is very important here. Unlike sole proprietorships, owners of S-Corporations are expected to take a wage. This means your profits should support being able to take a wage and pay employment taxes! S-Corporations file a separate return to both the IRS and state but pay no tax at the entity level (there is a $250 tax to the state of VT each year though) Then net profits of the business are moved to the shareholder’s personal return and are subject to income tax only (no self-employment tax).
3. How do I figure out my rate and make sure I’m covered when it’s tax time?
Figuring out tax rates:
Figuring out your tax rate and whether you should pay in quarterly estimates to the government depends on both your income and your business format. We recommend getting a bookkeeping software QuickBooks is a very user friendly brand, to keep track of all your income and expenses. (Quickbooks can (a) provide a more in-depth look at the program and (b) give readers the ability to 'test drive' a "mock account." That allows individuals to view how the software looks and operates without signing up for a free trial. It's a no email required and no strings attached peek to determine if QB might be a good fit.)
As a sole proprietor, your profits are subject to 15.3% self-employment tax plus regular income tax. We recommend at a minimum sending in the 15.3% to the IRS on your profits. Depending on any other income on your return, you may need to send in additional money. Many people find that doing a mock tax return is helpful to see what their tax liability could be.
Owners of S-Corporations may also consider sending in estimated tax payments. Often times your wages are the only way money gets paid into the government during the year so depending on your profits, you may want to send in additional money.
To avoid underpayment penalties by both the IRS and Vermont, the best rule of thumb is to pay in 100% of the prior year’s tax, in the current year. For example: If total tax owed to the IRS in 2015, before calculating any withholding or estimates already paid on your behalf, was $5,000 then in 2016 you should make sure you have $5,000 paid in between withholding and estimates.
4. How do I choose an accountant? Do they need to have experience with photography businesses?
Choosing an accountant:
Choosing an accountant is a completely personal decision, it must feel right! Generally, it’s not required that your tax preparer have intimate knowledge of your profession but asking them if they prepare returns for other photographers may be something you want to know. Again, it’s completely up to you.
5. Should I have separate business accountants?
Separate bank accounts:
We always advocate the separation of personal and business accounts. It’s really the easiest way to make sure all your income and expenses are being tracked appropriately. However, it’s not required that you have a separate business account when you are a sole proprietor. If you are an LLC or corporation it is a requirement! Best practice is to keep it all separate.
6. Is it possible to setup a retirement savings account through your own business? What options are available?
Retirement savings accounts:
It is always possible to set up a retirement account through your business! SEP IRAs, Simple IRAs, 401(K)s may all be possibilities. Also, individuals can contribute to traditional or Roth IRAs which would likely be outside of the business. Retirement account rules can be complex so ask a CPA before going forward with anything to make sure the account is appropriate for you.
7. What items are tax deductible for my photography business?
Items that are deductible:
Generally anything related to the business will be deductible. Examples include but are not limited to: equipment purchases, repairs to equipment, office supplies, meals with clients or prospective clients, office rent, telephone expense, website, mileage to clients or getting supplies.
8. When hired by a company to take photos, what forms should you fill out if they pay you as a sub-contractor?
Generally, if a business wants to pay you as a subcontractor, they will ask you to fill out a W-9 indicating your business name and EIN number. At the end of the year they will likely send you a 1099-Misc which you would use in filing your tax return. The 1099-Misc is also sent to the IRS to avoid understatement of income.
9. Should a business owner still hang on to receipts for a certain number of years?
We advise people keep tax returns for 7 years. It’s best practice to keep everything related to the return (bank statements, canceled checks) for that amount of time.
If your in need of an accountant who understands the photography business or any other business for that matter, please contact:
Randee Tuepker Lindholm, CPA
Sanborn-Tuepker Associates, PC
43 Crescent St
Rutland, VT 05701
Please comment with other questions you might have about your photography business, so that I can help you.