Oh boy, you are all going to looooooove me today! (Enter extreme sarcasm here) Seriously - this is probably the most hated topic by everyone, especially small business owners... but it's necessary and it's important. As I began to do this whole "photography" thing and grow my business, I really didn't even know where to begin with anything... especially taxes. I found that I used my lack of knowledge as my excuse. "But if I didn't know, they can't come after me, can they?!" My sister, also a small business owner, would just laaaaugh at me. I became the joke of the family. "BUT I DIDN'T KNOW!" Yeah I quickly found out that it was no excuse. With the internet, there is no excuse not to be informed about our responsibilities - the information is out there, you just have to take the time to FIND it and LEARN it.
Before I begin, if you are looking for a resource for how to start a business, you should check out my Fotog Friday from a few months ago all about starting a business! Everything from business entities to bank accounts to licenses and everything in between. I mentioned taxes in that post, but I've come to realize that there is SO much debate and gray area when it comes to photography and taxes that I thought I'd share my two cents (pun intended) on the matter.
I am going to throw out this disclaimer: I am not an accountant or a tax professional. If you need help, the BEST thing you can do for yourself is hire a CPA (Certified Public Accountant) to work with you and answer all of your questions!
Small business owners don't get a paycheck with the taxes already removed. We have to figure it out for ourselves, and we need to be responsible to pay it, pay the right amount, and pay it on time. Last year, I tried to pay estimated quarterly taxes, but the forms I had were wrong and everything got sent back to me. Early this year, when my husband and I went to file our taxes, suddenly I was faced with the reality that somehow I needed to come up with the amount that I would owe for my income in 2011. I hadn't really done the best job of setting aside a portion of the income I was making and I started freaking out. Big time.
Fortunately for me, it wasn't as much as I thought and I had the money to pay it. SHEW! I'm NEVER doing that to myself again. The gentleman who was kind enough to file my taxes for me also set me up for paying my estimated quarterly taxes, and doing it RIGHT this year! I'm so thankful for that because I am operating with total peace of mind! SO here are a few things...
If you are making money... it doesn't matter how much or how little, and it doesn't matter if you have a "business" or not - you are responsible for paying taxes. How do we pay taxes if no one is taking out of our paycheck?
1. Estimated Quarterly Taxes
They are due every quarter, four times in a year. The form has a crazy complicated formula to figure out how much you may owe based on your income, but my tax man set me up with a simplier solution. Based on how much I owed in taxes last year, we divided that number by four, both federal and state, and made those my quarterly estimated payments for this year. That was SO much simplier and, since it's an estimate, at the end of the year I will either get a tax return (if I paid too much) or I will owe a bit more, but certainly not the ENTIRE amount like I had to do last year!
You can find the form HERE for federal taxes. It's called the 2012 Form 1040-ES.
You can find the form HERE for Virginia state taxes. In Virginia, it's called the 2012 Form 760ES/CG. If you are from another state, you can find it on your state tax website!
Estimated Quarterly Taxes are due on the same dates every year.
1. April 15
2. June 15
3. September 15
4. January 15
Don't ask me why they are spaced apart unevenly - I have no idea!
If this is your first year filing taxes as a small business, seek a tax professional to find out how much you should estimate you owe. There is some flexibility since it is an estimate, but there are penalities if you are more than a certain amount over or under (I think it's $1000, but I could be wrong!) Your state payment will be less than your federal, probably about a quarter of the size. When in doubt, set aside 25% of everything that comes in. Chances are you won't owe that much, but it's so much better to set aside too much than to not have enough and be required to pay much more later!
How much you will owe will depend on a LOT of factors:
1. How much you made
2. How much you are writing off in business expenses
3. Your tax bracket, depending on the income you make (and it is combined income if you are married!)
Which brings me to my second point:
2. Business Expenses
Keeping track of your business expenses is the BIGGEST FAVOR you can EVER do for yourself!! Seriously. Keep those receipts for any purchase that is for your business, track your mileage anywhere you go for business, and keep a spreadsheet of it all.
It can make a HUGE difference in how much you owe in taxes!
For example: If I make $40,000 in gross income (that is straight-from-the-client money), but I spend $15,000 in that year for business expenses (lenses, cameras, software, travel expenses, mileage, etc.) I will only owe taxes on the remaining money of $25,000. And if you spend a LOT investing in your business and growing it, you may spend most of what you make - and that is OK! That means you probably won't owe a ton in taxes, which is exciting! But you have to be responsible and keep track of it all, otherwise you can't write it off. In the event that you get audited (yikes!) you need to have records for everything that you are claiming! That means receipts for everything. Keep it. All. Seriously. Just do it.
3. Sales Tax
Oh, sales tax. To be perfectly honest, this is the main reason I wanted to write this blog post today. There has been so much debate, so much loop-holing, so much gray area with photographers and sales tax that I thought I would clear the air.
In Virginia, by law, we are required to charge sales tax on everything we sell. And that doesn't just mean album and print sales - it means our entire wedding package we sell.
Don't believe me? Here's the Virginia Tax Code.
Do I agree? No, in fact I hate it. But as long as the law is in place, it is my responsibility to obey it. Many places you go, labor and goods are divided, and sales tax is only added to the goods. Labor isn't supposed to be taxed, and any photographer will tell you that MOST of why they charge what they charge is for the labor. However, the tax code is extremely clear that even if you divide up your package into "Service" and "Goods" (goods being digital files, a USB or a DVD with images, etc.) the sales tax must be applied to the entire fee we charge the client. The latest debate I've heard is people arguing about digital files. They think if they only deliver the digital files ONLINE and don't give their client a physical product (i.e. a USB drive or a DVD) that they can get around the sales tax law. Nope. I hate to break it to you, but if you are a photographer in Virginia, you are responsible for charging and paying sales tax on the entire fee that you charge your client.
The humbling thing to remember is that the money is never yours to begin with. I have made it a distinct habit that the moment I receive money from a client, I immediately set aside the 5% VA sales tax amount into a separate account. It's out-of-sight, out-of-mind, so it doesn't feel like I'm "losing" money, but rather just a placeholder between my client and the government.
I do this for sales tax AND for my estimated quarterly taxes. If it's out of my checking account, I don't consider it my money anymore. I store it in a savings account until it is time to pay it and when the time comes, it's all there and it doesn't even hurt to pay it! It's not my money. It belongs to the government.
Clients have asked me why I charge sales tax and the reason is simple. I'm required by the government to do it, so therefore I will do it. At the end of the day, my goal is to be an honest businesswoman. I want my clients to trust me, to know I am taking care of them, and to know that I am being a responsible citizen by paying what I owe to the government.
Most importantly, I know that one day I will stand before God and be held accountable for all of my actions. If I try to find loopholes and work around the system, He knows. God has blessed me with this business and I know at any moment He could take it away. It isn't mine - it belongs to Him. My responsibility is to honor Him with how I operate and to be a good reflection of Jesus in all aspects of my business, not just the things that people see.
4. Paying Others and Taxes
If you hire a second shooter, you are required to issue that person a Form 1099-MISC if you paid them more than $600 in the calendar year. The reason is simple - they made money, therefore they are responsible to pay taxes on it. It's essentially a version of a W-2 that you are giving them, but instead of it being an employee/employer type thing, it's a form that covers "miscellaneous" income that they receive outside of their normal job.
You can find the Form 1099-MISC HERE!
I use a really easy/cheap website called File Taxes to file all of my 1099 forms for my second shooters.
Again, it stinks, but it's important to do everything right, legally, so that there isn't any shady business going on under the table. It's better to have everything documented, out in the open, so that in the event that you get audited (which happens a LOT more often for small business owners than normal people) you have been doing everything by the books all along.
5. Business Property Taxes
Oh, was I in for a rude awakening this year! As if these weren't enough taxes, we owe MORE taxes on what we own! That's right - anything that you purchase with business income, and you write off as a business expense, is owned by the business and not you. Therefore, the business owes taxes on the property. Hooray! (again, more sarcasm)
It's exactly the same as the personal property taxes you owe to your county for your car, but it's for anything the business owes. Once you register your business with your county and receive a business license, you'll receive a form from the county asking you to list the property and the value for everything the business owns. And guess what, photography equipment is EXPENSIVE! It adds up, and therefore the taxes add up as well. Once they calculate how much you owe, they will send you a bill.
This is something I was completely unaware of when I started and I'm thankful to know now so I can budget for it in the future!
I live in Fairfax County - here is the business property tax form I filled out a few months ago!
So many people gripe and moan about how expensive wedding photography is... they see us at weddings shooting for the day, but they don't think about the work that goes into editing, websites, blogs, image delivery, album design... the list could go on! The other thing people need to consider is all of the TAXES we owe. It's exhausting. Normal people have their taxes removed and they don't think twice about it. We see it all come and go, and if you don't plan ahead of it, it can hurt... BIG TIME. So far this year I've spent 47% of the money I've made on business expenses... much of that is taxes. Next time you hear someone complain about how expensive wedding photography is, gently remind that person that the photographer might not even be taking home HALF of that income, just beacuse of all of the expenses we have and the money we owe!
I'd be more than happy to answer any questions I am capable of, but as I mentioned before I am no tax expert, just a small business owner who is learning along the way! If you need further assistance, seek the help of a local CPA - they are the pros! Have a wonderful weekend!
Here are the links again: