Understanding Taxes and Accounting
The tax man. You are in a very select group of people who are extraordinarily vulnerable when it comes to taxes. Because if you are not aware of how you are supposed to file your taxes as an independent sole proprietor, you will find yourself in a rears with the IRS. And I cannot tell you how many photographers I know, who are my age at this point, who are still paying back the taxes they didn't pay when they were assistants because they just didn't know and no one told them. Thousands and thousands of dollars, ruined credit ratings, all of it. You need to, if you're making money as a photographer, you need to consult an accountant. Do not try to file a 1040 easy form with a bunch of 1099s. It's not gonna work. Pay the $250, let an accountant do your work, find somebody in the industry who understands photography or creatives, not just photographers. My accountant handles all sorts of creatives. Because our write-offs are different, the things that we can claim are different, the 1099 ...
system is different, all of it. You need to be aware that you can get yourself in a deep, deep hole with your taxes as an independent contractor. It's really important to know. So this also speaks to the idea of becoming a business, rather than just being a person. So I file three tax returns every year for my two production companies and my person. And by keeping those things separate, I get to claim the things that are appropriate for each of those. And I actually get more write-offs that way because my business has specific needs, my production company has specific needs, and I personally have different write-offs. So insulating myself from being effected by my personal income tax or my personal situation being effected by my business in a negative way. And I pay my taxes quarterly so I don't get hit with an enormous bill every January, because you file in January as business. I don't get hit with an enormous bill every year because I'm paying monthly. So at the end of a four quarter cycle, I consult my accountant and we file taxes and he says, okay you either are gonna get x amount back or you owe x amount and we have a running account with the IRS. So it's very different than, as a person, you file every year and it's, when you're a corporation, you basically have a running account with the IRS. So when I have overage, I leave it in there because I'm constantly paying taxes. And when I have a shortage, I'll either wait until the next quarter and add it to that or wait until I get my next return and that will balance the scales again. So it's important to understand that when you file as a business you're offered different protections but you also have to be super organized in order to be able to understand that. And, again, get help. Don't try to manage it on your own, you're gonna get yourself in trouble. If, lets see, what else? Oh. The other thing that's really important, and a lot of people miss the boat on, is you don't want to pay taxes on your expenses. So if you're being you're invoicing your clients for your creative fees, your day rate, your usage fees, your expenses, your prop rental, your studio, all these things, and it comes in one check, you don't want to pay taxes on all that money. That's why one of the reasons why you have to have an accountant to unpack all of that stuff because you don't want to count all of that as income, because it's not. And a lot of times people get the checks, they put them in the bank, they pay off whoever they have to pay off, but they realize, if you get audited, that's gonna show up as income. Because if you don't delineate what those things are really clearly, and with specific write-offs, I mean, considering the productions that I'm involved in, not even the ones on the advertising end, but just the editorial stuff that I run through my personal my production company, if I were paying taxes on all the expense money, I'd be in trouble every year. So you have to know how to unpack those things and keep really good records. And keep both physical copies of receipts and digital copies of receipts. Because when they come looking for you and they want you to justify how do you justify this as not as income, you need to have the receipts to prove it. Keep them organized, scan them, keep them in your computer, all of that's gonna make a difference because if you get audited and you're prepared, you're gonna come out of it without a problem. If you get audited and you're unprepared, you're gonna end up costing you money. And that is not what you want to be as a business. You don't want to take setbacks because you're not organized.
Speaking of receipts, digital and paper receipts, how long do you tend to keep those around?
Business tax returns need to be five years back, I think, if not seven. I have a storage unit. I keep all of my tax and receipts and all that off site because if my studio burns down and I lose not only my gear but all my receipts, it's gonna be bad. That goes for a lot of things that you need in duplicate, like your files and your archive. And I'll talk about that later. But I think you should always keep things in separate places. Because that's why you make the digital copies and that's why you keep them off-site. So you have them all the time.
Yup, and we're hearing seven years out, at least seven years out here, which is great.
Thank you for the correction, internet.
Do you use any particular type of software internally when you're working with tax stuff and how you send stuff to your accountant or is it like a paper bag full of?
No, I scan all my receipts and I then file them as PDFs. I also keep a running tab of my expenses and a running tab of my invoices in a spreadsheet program. Right now I'm using Google. Everything's online because then I can share that with my accountant seamlessly. I don't have any particular piece of software because I don't do my own taxes. I basically just have an organization of files and understanding of what I'm making on a running scale and I'm able to share that with my accountant who plugs it in to whatever software he uses.
Things change state to state.
So is that the kind of thing, and then there's sort of sales tax. You wanna?
Well, I mean you have to be aware of your local laws and, when you cross state lines to work, you need to be aware that if they're issuing a check from a different state you may end up needing to file, if you make a lot of money in a particular state that you don't live in, you may need to file taxes in that state. So, again, get an accountant, because your accountant is going to be able to unpack all of those things, especially if you're working across a region where you're crossing state lines and getting checks from lots of different places. You may want to, I think clearly only when you're an employee of a company you have to file taxes in multiple states, but I can't be certain about that because I'm not a tax attorney. But I know that from my perspective, having somebody who has those resources, like my accountant, good old Mel, he gets everything and then if he has any questions he says, "Where did you get this check from? "Who worked? Who is that? Blah blah blah," and he figures it out. And as you grow as a business, you're gonna find that you need to rely on people in that regard. It's just too much to tackle otherwise.
Purchasing food to take pictures of, if you write that off as a supply or if you write that off as a meal or expense, because I was looking at both of those.
Well, you know, when you're talking about feeding your crew, and if your crew is you when you're working, that's a write-off. But also when you're buying food, as food cost, for a job that's all expenses. That's reimbursable expenses. So if you're doing it for yourself then clearly you're not going to reimburse yourself so it's a write-off. But if it's a reimbursable expense then it's basically a wash between you and the IRS, meaning you're buying the food, your client is paying you back for the food, it's a wash.
I was wondering if you could talk a bit more about your business structure and if you're an employee of your production companies or how that works.
Right. My production, I have two. One is dormant at the moment because I'm using it to build another business but I don't have technically any employees in that business yet. And the other business that I run all my food photography out of is just two people. Myself and my wife and we are partners. So when you're in a two-person partnership in a corporation, you're protected against having to, and both people are owners, you're protected against having to buy things like having to do payroll, having to do workman's comp, all those other things that you would normally have to do if you have multiple employees. Once you go above three and four and five, then health insurance becomes an issue, all of those things, especially if they're full time employees. So, as a small business, I rely heavily on freelancers. So when at the end of the tax year I get a listing of all the people who work for me during that year, I make sure they make the threshold of $ and once they're over $600 as a freelancer you have to give them a 1099 and I send all that information to my accountant and he sends out all the 1099s for the freelancers to file their taxes.