As artists, we are fairly used to the fact that we must wear many hats. Many of us freelance – we work multiple part-time jobs, devote time to our artistic practice, and continue to seek alternative ways to make a few extra bucks. When it comes to the end of the year and tax time, many of us aren’t thinking of how all this affects our tax situation or even how to file a tax return correctly with all the different types of income we have earned over the year. All income is taxable, but it is treated quite differently on a tax return and as you go about getting gigs over the course of a year, you should be informed about how you are getting paid and what it will mean to you at tax time.
The easiest type of earnings to deal with are those found on a regular W-2, because an employer who withholds and pays state and federal taxes takes care of paying and filing your Social Security and Medicare taxes through regular payroll. The employer pays you “X” amount of dollars per hour, and then deducts from that your state and federal taxes, one half of your Social Security and Medicare taxes (7.65%), and pays you in the form of a paycheck the remaining money (less any other deductions like 401K, etc). The employer pays the other half of your Social Security and Medicare out of their own pocket on your behalf. When tax time comes, this is usually easy for folks who only earn money from W-2 jobs, as their earnings have already been taxed, and the total of all W-2 income usually goes on the first line of the federal tax return.
As an independent contractor, you essentially run a small business
All of that paperwork can be complicated enough and, to make things more difficult, many businesses who hire creatives as “independent contractors” – paying an hourly rate or a set fee for a project – will issue a 1099 MISC instead of on a W-2 form. It might seem like you are getting more money this way, as it will be almost 25% more in your pocket because no taxes have been paid out. Many people make the mistake of placing this type of income on the first line of the 1040 federal tax return, but unfortunately it doesn’t belong there. When you earn 1099 income, it is subject to federal, state, Social Security, and Medicare taxes, and you are responsible to pay all of those yourself. As an independent contractor, you essentially run a small business as a graphic designer for an independent publisher or as a costumer for a small theater or as a skilled craftsperson assisting an artist in his or her studio. Any 1099 income in Box 7 must be reported on a Schedule C, profit and loss from a business. Anyone who pays you more than $600 in a calendar year as an independent contractor must issue you a 1099. Any money you earn in your small business must be reported on this form, whether it is over $600 or not. You are then allowed to deduct expenses related to earning this income off of this Schedule C, and then the remaining profit or loss is carried over to your 1040 form for regular income taxes. You must also file, a Schedule SE, or Self-Employment tax form, to pay the entire 15.3% of Social Security and Medicare taxes on the profit of this small business.
If you are running multiple small businesses, like a dog-walking service, independent yoga instruction, honoraria for lectures or curation, as well as selling your work, you need to set up a separate Schedule C for each of these different types of incomes. The IRS has codes assigned to types of businesses so they can determine what types of expenses are reasonable and customary to each business type. It is extremely important that you keep excellent records of all the expenses used in each type of business, as each dollar of expenses essentially equals 25 cents off your Federal income taxes. For example, the IRS code for independent artists, writers, and performers is 711510. You would use this code on your Schedule C to account for sales of your artwork, honoraria for a performance, or any art related freelance work you might be doing as an independent contractor. Expenses like craft show fees, purchase of a domain name and hosting your arts related website, dues and professional subscriptions, parking and taxis, materials and supplies, and a portion of your Internet and cell phone usage related to this business are all deductible on your Schedule C with the code mentioned above. If you are wearing so many hats that it is difficult to keep track of separating the various expenses, you might want to set up separate bank accounts so you can better track your income vs. expenses for each small business.
Many employers pay what should be a regular employee as an independent contractor, to avoid the payroll paperwork as well as not having to pay for holidays, vacation pay, and other benefits. The IRS is cracking down on this practice and freelancers should be wary of being paid with a 1099, when the company is clearly controlling what you do, how you do it, and when you are on the clock. It would appear that the IRS would rather you get paid with a 1099 because then the taxes would be higher, but with a W-2, all of the earnings are taxable, rather than with the Schedule C, where you are allowed to deduct expenses from the income. The burden of proof essentially lies with the taxpayer, so make sure that you are being paid as an employee when you are one, and as an independent contractor when you fall into that category. See, all earnings are not equal, whether in your pocket or in the pocket of the IRS.
Janet Ecklebarger has been a practicing artist for over twenty years and, for almost ten years, has been preparing income taxes. She specializes in deductions for artists, musicians, and other creative types while also offering tax and accounting techniques for the right brained.