The following is a guest post from former actor and current CPA Tom Kenison.
The mere mention of taxes can elicit a wide range of reactions from benign neglect to outright panic- especially among those who see themselves as “artistic types”- unfortunately, neither response is helpful. The reality of taxes for artists, or anyone for that matter, requires nothing more than a good system and an understanding of your particular circumstances.
Whatever your profession- “artist” or not- it is ultimately your responsibility to take the lead and manage your affairs.
Is it a W2 or 1099-MISC? BIG DIFFERENCE! As a professional performer it will not be uncommon for you to receive multiple W2s or 1099-MISCs- or both. Know how you are paid. If you receive a W2, you probably had to fill out a W4 (Withholding Classification) to tell your employer how much Federal and State Income tax to withhold from your check. If you made $10,000 you probably only received $7,500 “after taxes”.
If you received a 1099-MISC, you probably didn’t have any taxes withheld on that amount. It looks great since you made $10,000 and got paid a $10,000 – SWEET! Unfortunately though, since you were paid as a contractor and not an employee, you will be responsible for submitting the taxes due by way of quarterly estimated taxes, both Federal and State (more on quarterly estimated taxes below).
This is one of the most common topics of discussion come tax time, but before we “go there” we need to determine your filing category. The IRS allows each “Single” filing taxpayer a standard deduction amount of $7,750. If you are a taxpayer with mortgage interest, high state tax payments or unreimbursed business expenses (most performers have these), then you will need to determine if you want to file a Schedule A (Schedule for Itemized deductions.) You would only itemize your deductions if your expenses exceeded the amount of the allotted standard deduction- $7,750 for Singles.
The other type of deduction that you could apply is expenses incurred as “Self-Employed” person. Self-Employed taxpayers will file a Schedule C, then deduct their expenses against any Self-Employment income (i.e 1099-MISC or untaxed income.) FYI- if you are Self-Employed, you could have expenses reported on Schedule C and still qualify for the Standard deduction.
The IRS code states that “There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.”
I think we’ve all heard the amazing creativity of our fellow citizens when it comes to applying the standard of “Ordinary and Necessary” to determine if an expense is actually a business expense. The IRS explains that a “necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.” This leaves a bit of subjectivity as to what qualifies as deductible for artists. Expenses related to classes, headshots, stage makeup, commissions to agent, voice lessons, websites, etc. are slam dunks. Other expenses may fall into a bit of a gray area, requiring additional scrutiny from you and your accountant.
Just an FYI- a deduction is only a benefit to the extent of your tax liability. Let’s say you are in the 30% tax bracket. If you spend $100 and deduct it on your return, you would reduce your actual tax liability by $30. It’s not “dollar for “dollar” as it sometimes is misconstrued.
What the …..? Many people are not aware that both Federal and State Income taxes are due every quarter (April, June, September, January- on the 15th day of those months.) If you are an employee, you are probably already paying taxes via withholdings, however if you are self-employed (i.e. receiving a 1099-MISC), you may be in for a surprise.
If you earned income and received a 1099-MISC in 2014, you may already be underpaid as you sit down to prepare your 2014 tax filings. My advice is to monitor this on a quarterly basis and estimate that a minimum of 30% of your gross 1099-MISC will need to be paid in form of a quarterly payment. Set that 30% aside in a designated savings account each time you get a paycheck (from 1099-MISC work), then send off your total saved balance by the respective quarterly filing deadline. That way you’ll be prepared instead of scrambling for cash to fulfill your tax liability when April rolls around.
There are some good tax software programs out there, but once you enter the world of self-employment and multi-state filings, you probably want to seek out a professional. I can’t speak to the big tax preparers and how much they charge, but be ready to pay up- especially if your return gets complicated. If you hire a good accountant they should be able to you save you at least the amount of their fee, if not more. Here is a quick list of when to hire or DIY:
If you answered YES to one of the above I would suggest you consider outsourcing your taxes to a professional. If you answered YES to more than one, I would definitely recommend you seek professional help (preferably a CPA or an Enrolled Agent- both of which have extensive training in this field.)
If you find yourself getting discouraged, think of your future refund. Then take a breath and do what you need to do to get it!
Tom is a CPA with 15 years of experience working with individuals, businesses and non-profits to help minimize their tax liability and properly structure their business endeavors. Once upon a time he also enjoyed acting in over 100 plays and continues to develop his craft. He always finds time to sneak in a Broadway show or two during his many visits to NYC. firstname.lastname@example.org