This is just a base-level introduction to financial management for artists breaching 3 subjects:
Taxes, Budgeting, and Banking/Credit
In part 1, we talk about taxes. Let's dig in.
If you so much as breathe air in the United States, you pay taxes. Whether that's sales tax, property tax, income tax. Everything is fucking taxed. So, how do you pay taxes as a freelance artist, independent contractor, or small business?
Let's set an example to get started. Say I'm a freelance artist, 100% of my income comes from making & selling art (in whatever capacity). A few contract jobs here, artist markets there, and let's also say I sell products on a website like Big Cartel or Squarespace.
You don't need a contractor or business license if you're just starting small. You only need to file your taxes with your social security number. You report your income on Schedule C (Form 1040) and you must file a Schedule SE if your net earnings from self-employment are $400 or more. Not a lot, I know.
If you do work for a company as an independent contractor and that income is $600 or more, that business will send you a 1099-NEC. That's a pretty straightforward document, it's much like a W2. A business is telling the IRS, "Hey, we paid these people." It's your responsibility to set aside some of that money to pay the IRS because you're not an employer of that business so they are not doing any withholdings for you.
Before we can even start filing our taxes, we have to figure out how much of the money you earn will have to be set aside for tax payments. When you have a "real" job, meaning your employer handles all this paperwork, they deduct from your paycheck federal income tax, social security tax, and state and sometimes city taxes depending on where you live.
Let's say in your first year you make $18,000 (gross income)* from art-related work. We'll break that down to $1,500 monthly paycheck to yourself.
*We're going to also assume in this example you're filing as Single and have another job working for an employer and you're in a solid tax bracket. Even if you have two jobs and one of those is an independent, your total annual income from all your jobs determines your tax bracket. There are seven federal tax brackets for the 2021 tax year: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Your bracket depends on your taxable income and filing status.
The total Federal Taxable income you would have to apply to that 18K is 27.3% and here's why:
15.3% toward social security & medicare, 12% toward federal tax. Let's say you live in Cincinnati, Ohio where the state tax is 2.765% and the city tax is 1.8% (You're going to have to look up where you live in order to calculate your state and/or city tax, usually you can find that info on a state government website).
In total, that all adds up to about 32%. So 32% of your gross annual income, which is $18,000, is deducted. That is what you pay the IRS on a quarterly basis.
"Why quarterly? When I was a barista I only paid my taxes once a year"
Because if you earn more than $1,000 monthly as an independent, you make quarterly payments to the IRS to avoid an additional late penalty tax (which isn't really the end of the world). The joys of being your own boss! This is you taking the standard deduction on your own, look at you go!
Quarterly payments to the IRS for 2022 are: April 15, June 15, Sept 15, Jan 15
"But the IRS is scary! I don't know what to do!"
Here's what you do. Let's say you budget & hustle really well. Some months you earn more than $1,500, and some months you earn less. No matter how much you earn, to be safe, set up a monthly direct deposit from a checking account (or wherever you keep your income) to move into a savings account. The amount you should deposit monthly, let's pad our budget and round it up to 35% a month.
Here's a breakdown of how we got here:
Total Annual Income: $18,000 x 27.3% (federal) = $4,914 (annual) / 12 = $409.50/monthly set aside
$18,000 x 2.765% state tax = $497.70 (annual) / 12 = $41.50/mo. set aside
$17.661.72 x 1.8% city tax = $324 (annual) / 12 = $27/mo set aside
That adds up to $478 you should set aside from your income each month into your savings account where you will responsibly keep your quarterly tax payments. But to pad your budget and set aside extra in case you totally fuck up, round it up to 35% so you should really set aside $525. If you overpay the IRS, they will give you what you did not owe back to you.
"How do I pay the IRS???"
It's sort of the easiest step, once you set up your online account with the IRS, which requires proof of identity through documentation (i.e. driver's license, birth certificate, social security card, passport).
Then you can use Free File or you can go old school and just mail them your payments, but it's the year 2022 of our lord and everything is on the internet.
E-Commerce & Taxes
Now, if more than $600 dollars of that income is coming from your online store, you're going to be sent a tax form from a site like Venmo, PayPal, Big Cartel, Squarespace, or Shopify. To access these forms, you log into your account and somewhere in the account settings, you should be able to easily find a tab that takes you to documents and tax documents according to year. While they calculate sales tax on your purchases, sales tax is something you also have to file. This is where we're creating a difference between running a business vs. being an independent contractor.
Because I want to avoid more headaches, I avoid this world altogether. But, websites like Shopify do have very informative articles that can help you. Usually, website platforms like these will automatically calculate sales tax for you, so that's easy. Other platforms like NetSuite even provide a Comprehensive List of E-Commerce Sales Tax Laws by State.
I would consult these articles to help you along the way if you are relying heavily on e-commerce to make your earnings. Since I've only really worked as an independent, without e-commerce, I won't give you advice on this subject, but we will talk about how factoring tax payments into your budget will make paying the IRS way easier.
Something else to consider, which can help you get a break on your tax payments, is your write-offs for expenses. These are "necessary" expenses to help you do business, though they don't have to be absolutely indispensable to be considered necessary in the eyes of the IRS. Definitely click the linked article for a deeper dive into expenses and business write-offs.
So, that is our introduction to taxes. Hopefully, that's a good foundation to get you started on your tax journey as an independent artist. Definitely do your research for where you live and take this information with a grain of salt. When in doubt, you can hire an accountant (if you have the money, but that's where budgeting can come into play! Stay tuned for part 2: Budgeting.