Creative Biz Note #15

Deductions: Being Smart with Your Money

Paperwork is just part of the illustration process. Estimates, invoices, contracts and finally...taxes. All my moaning and groaning hasn't made it go away!

If you're serious about saving money and running a tight ship, then you will always be looking for deductions. But who wants to think about taxes all year round!? Eventually, it will become an effortless habit--believe it or not. The categories to deduct are: home office sq. footage, meals while doing business, travel for business (conventions), advertising, supplies, office equipment, hardware/software, utilities (phone), insurance, postage, subscriptions, books, attorneys, accountants, and services/other freelancers. If you have to replace a lightbulb in your office--you can deduct it! Anything that goes into your office is fair game. As an artist, you can deduct anything that furthers you as an artist for your business. Anything that relates to your art business. Our business is about visual stimulation...that falls into many categories. If the deduction is unclear, then be sure to write the reason/purpose of the deduction on your receipt.

The dreaded self-employment tax...uggh! In the U.S., you must pay self-employment tax if your net earnings were $400 or more. It's around 15.3% of your net earnings (12.4% for Social Security & 2.9% for Medicare). BUT you can deduct half of your self-employment tax before applying it (double-check this). This is a big chunk of your earnings. This tax alone can put an unprepared beginning artist in debt! The government has an interest rate of 8%--if you are in good standing and can pay off the balance in three years. If you ignore deadlines, etc., you can be hit with a late-payment fee of up to 47.5% of the balance. Talk to your accountant about possibly avoiding self-employment tax!

When it comes to getting taxes finished correctly, completed on-time and minimizing my tax bill--I'll spend the money on an accountant. I can't stress this enough. And I'm not talking about using H&R Block!! Now, there are good and bad accountants...so get a recommendation from someone that already runs a small business. Become friends with your accountant...they will be helping your business grow to it's fullest potential. To put it in perspective...if I spend $800 on an accountant but he or she saves me $2000 on my taxes and this is money that I never would have received doing it on my own--it becomes worthwhile. Do what you do best--illustrate--and then delegate what you can.

I'm more than capable of doing my own taxes (most of us are). But one of the best skills to have as a business owner is to learn to delegate. It's not a weakness but a way to keep focused. November is the month that we go over taxes with our accountant. My brother and I go over next years budget and this years income too. We do a quick evaluation and this gives us an idea of what's coming up and if more money should go into our 401Ks. As a small business owner, setting up a 401k is inexpensive and worthwhile.

A Quick Story: I have a good friend that's a freelance software engineer--genius level-- and for many years we both complained about our tax bills. I eventually got an accountant...he still does things on his own. Even though he's the smartest guy I know, he won't delegate his taxes to an accountant or at the least incorporate. He pays the price every year.

The Idea: Even as a beginning illustrator, the sooner the better. Ask a small business owner to be your adviser. Make a conscience effort to be constantly deducting (when applicable); get an accountant; keep your receipts and use accounting software. Be truthful and be smart when it comes to your options.

Books to read on this subject: 'Tax Deductions A to Z Freelance and Contract Workers'
For additional info: Creative Biz Note #8

Next Creative Biz Note #16---Pixelboy's Studio Set-Up