For most creatives, taxes are scary. So, I don't blame you for wanting to shy away from this critical financial topic. But you don't have to delay or avoid taxes any longer.
I am an accountant and tax pro for creatives, and I have a solution to all your tax problems. Take note of this advice, and then you can spend the rest of your days focused on your passion.
I don't want to brag, but one of my strengths is saving my clients money. Seriously, I've never cost my clients more money than I saved them. For example, if I kept you from paying Uncle Sam $20,000, but then charged you $10,000 a year for your financial support, you are making a $10,000 profit by hiring me. Crazy, I know.
Well here's what's even crazier, I am about to show you how you can benefit from filing your taxes as a business and deduct significant business expenses, like hiring me! This article is a quick tax guide for creatives. Use this article to help you save both time and money throughout the year.
Your Tax Problem & How I Can Fix It
Unfortunately, most people's accountants only do tax preparation. I have been helping creatives with tax support and financial planning long enough to know that tax preparation, once a year, is not enough. Your accountant should do tax planning throughout the year.
Proper tax planning can help you both personally and professionally. More importantly, it ensures that you keep more of the money you earn. That way, you can grow your business or invest what you earn into other business ventures.
The clients that work with me receive tax strategies throughout the year and, as a result, save a lot of money on taxes. Therefore, by the time you do the math, you'll realize I saved you more money than I cost.
Taxes 101
The first step to understanding taxes is understanding the basics behind taxes, tax brackets, and tax deductions. Taxes are the only way federal and local governments generate revenue to pay for public programs, schools, and other public goods and services. So Uncle Sam is always going to want you to spend as much on taxes as possible.
However, governments give companies the best tax advantages because they want you to succeed. Successful businesses create jobs, which results in more people who pay taxes and contribute to the economy. The government assumes what you save on taxes you will reinvest into your business. In this scenario, everybody wins.
Tax Deductions
Simply put, tax deductions are expenses you incurred for your business that you can subtract from the income you earned that year. Then, you are taxed only on the amount of money left over. So your taxable income equals your total income earned minus your tax-deductible expenses.
Taxable Income = Total Revenue Earned - Qualified Tax Deductions
As a business owner, when you qualify for tax deductions, you make your tax savings bigger. As a creative, you have the opportunity to deduct many business expenses such as photoshoots, agent fees, the cost of your accountant, and more.
Tax Tip: To keep up with all your expenses, keep a journal, save all your receipts, or track your expenses in apps like Smart Receipts and BizXpense Tracker.
For personal taxes, individuals can claim the standard tax deduction. Thanks to this automatic deduction from the government, no one pays taxes on their full income. Everyone qualifies for the standard tax deduction, and this deduction makes filing your taxes simpler. With the standard deduction, you don't have to itemize all of your personal expenses.
For 2020, the standard deduction is $12,400 for single filers and married filers filing separately. The standard deduction is $24,800 for married filers filing jointly and $18,650 for heads of household.
Tax Brackets
Because of the way our tax system works, people who earn more money pay a higher percentage of their income in taxes. Tax brackets are income ranges set by the government. If you fall within a specific range, you pay that percentage of your income in taxes at tax time.
You can also think of tax brackets as thresholds—once you pass a certain income level, the money you earn over that threshold, the government will require you to pay taxes for that income at the higher tax rate. However, money earned before meeting the threshold is taxed at a lower tax bracket's rate.
Imagine you are a single filer who made $50,000 this year. Your income would be taxed based on three different tax brackets. For example, in 2020, for single filers, their first $9,875 is only taxed 10%. Then, you'll pay a 12% tax rate on your income of $9,876 to $40,125 and a 22% tax rate on your income $40,126 to $85,525.
Here are the calculations for a better understanding.
You must pay 10% on income up to $9,875
$9,875 x .10 tax bracket = $987.50 owed in 10% tax bracket
You must pay 12% on income between $9,875 and $40,125:
$40,125-$9,875 = $30,250 of income in the 12% bracket
$30,250 x .12 tax rate = $3,630 owed in 12% bracket
You must pay 22% on income between $40,126 and $85,525
$50,000 (your income) - $40,126 = $9,874 of income in the 22% bracket
$9,874 x .22 tax rate = $2,172.28 owed in 22% bracket
To find your total taxes owed, add up the amounts due.
$987.50 + $3,630 + $2,172.28 = $6,789.78 in total taxes owed
Figuring out your tax bracket doesn't have to be complicated, and remember, I am a tax pro here to assist you. However, you can also use this tax bracket calculator to help.
Perks of Filing As a Business
At tax time, the goal is to pay as little in taxes as possible. As mentioned previously, businesses qualify for the most tax savings. Here's proof in the numbers:
As a business, you can apply individual tax deductions to your business' taxable income, therefore reducing your total taxable income.
Let's say you made $50,000 as a business one year. Take your business income and subtract your qualifying business tax deductions like mileage, postage, website fees, advertising, event promotions, travel, etc.
$50,000 (total income) - $10,000 (business expenses) =
$40,000 taxable business income
Next, you get to take your standard personal deduction.
$40,000 (taxable business income) - $12,400 (standard personal tax deduction in 2020) = $27,600 (your personal taxable income)
But we are not done yet! Now you have to figure out your taxes owed based on your tax brackets.
You can calculate your total owed taxes by portioning it out by tax brackets as I showed you earlier:
$9,875 x .10 = $987.50 owed in 10% tax bracket
$27,600 (your taxable income) - $9,875 = $17,725 total income falling in 12% tax bracket
$17,725 x .12 = $2,127 owed in 12% tax bracket
Now, add the totals from both tax brackets together:
$987.50 + $2,127 = $3114.50 total owed in taxes
So with $50,000 in income, you owed $6,789.78 in taxes. But when you treat yourself like a business, you only owed $3,114.50.
Note: This calculation is for federal income tax only. Self-employed people also owe self-employment taxes for things like medicare and social security. A portion of your self-employment tax is deductible, which means your taxable income could be even lower!
Save Yourself Time, Money, and Math
I outlined these tax examples to give you a basic understanding of taxes and the advantages of filing as a business. However, I know that as a creative, you want to focus on your craft.
So, let's connect and talk about how I can help you maximize your income and minimize your taxes. Remember, my goal is to help you keep as much revenue as possible and to take the burden of doing your taxes away.
Benefits of Hiring a Tax Pro
A tax pro can help you figure out the best business structure for your company, identify all of the qualified tax deductions you qualify for, and do the tax calculations.
Even if you don't work with me, I want you to be empowered and understand how to do simple tax calculations. But don't be afraid to use me to do the work for you.
Use this knowledge to hold your accountant accountable and start the tax conversation. Remember, you should talk to your accountant more than once a year, so you know for sure you are deducting the most expenses possible.
Please help me, help you by keeping organized records of your business expenses. You no longer have to wait or procrastinate. Most importantly, my fees are a qualified tax-deductible expense, so contacting me will help you save money.
Besides taxes, what's another business task you hate? Share your response in the comments below. And don't forget to contact me. I bet I can help.