Financial Literacy: A Cheat Sheet for Artists
It’s a well-worn cliche, but it’s true: “Knowledge is power,” and nowhere is this more apparent than in our financial lives. Because being deeply invested in money management often feels uncreative, many artists get comfortable with keeping their understanding of their financial health and future as vague as possible, a kind of “if I don’t see it, it doesn’t exist” approach. A critical understanding of artist finances is key in the lead-up to tax season.
Segregate Artistic and Personal Finances
For artists, it is helpful to separate your personal and artistic finances. It’s important to use good bookkeeping practices for your self-employment, and it will help immensely at tax time. Open a separate checking account at your bank, with its own check card to pay for artistic purchases.
Transfer money from the Art-Making Account to the Personal Account when you can, and write this artist fee into budgets for grants. Do not always put yourself last on the list or you will never get paid. You can “lend” yourself money by transferring funds from one account to the other, but make note of it in your bookkeeping so you can distinguish between “lending” and “paying.”
Schedule C is where you report both the income and expenses from your artist work on your federal tax form. As an artist, you are considered a self-employed business person, or ‘sole proprietor’. Whatever remains after you deduct the expenses from the income is your net profit as a self-employed entity. You must pay Self-Employment Tax on that profit (15.2%) above and beyond the regular taxes you owe on other income.
If you do end up having a significant net profit, and owing a significant tax liability (over $1,000), the IRS would prefer that you pay Estimated Taxes quarterly so that you don’t owe this large amount all at once on April 15.
THE IRS IS NOT OUT TO GET YOU. In fact, most artists underreport their expenses for fear of triggering an audit. Of course, an audit can happen at any time, although our chances of being audited are less than 1%.
Your best defense against an audit is to keep good records. For example, pay for business expenses with a bank debit or credit card so you have a paper trail. Keep paper receipts for large (over $500) items. Keep a mileage log in your car, or write down “28 round-trips to Trenton x 100 miles = 2800.” Write in your date book when you travel out of town for work and give yourself the Federal per diem rates for those cities. You can visit www.gsa.gov to look up the rates for different cities.
Business Deductions for Taxes
It is critical that artists know what aspects of their practice or process are tax deductible. The IRS definition of what you can deduct allows deductions for expenses that are “ordinary” to your line of work and “necessary” to your business. So YOU are the expert on what that means for the artistic work you do as a self-employed artist. A non-exclusive list of costs that can be deducted include:
- Advertising (headshots, mailings)
- Books (research scripts)
- Business Gifts (flowers, cards)
- Contract Labor (paying people)
- Local Travel (bus, taxi, bike)
- Meals (in town, business)
- Professional Development (artistic research)
- Project Expenses (set, prop, costume, music, rented space)
Keep good records. Separate your personal and business expenses. Don’t underestimate your business expenses for fear of audit. Educate yourself on the IRS and State Department of Revenue websites. And finally, remember that YOU ARE THE EXPERT on what you need to earn, learn and spend in order to have a sustainable life as an artist.
Creative Capital hosts in-person and online workshops to help artists build a sustainable and fulfilling practice. Check our calendar for upcoming opportunities to learn more about financial literacy and much more.