The 7 Common Tax Mistakes Made By Photographers

The 7 Common Tax Mistakes Made By Photographers

This year, the Federal and State Governments are broke and they’ve hired more auditors in an attempt to generate more revenue. This means that small independent businesses, like photographers, are facing increased scrutiny of their books.

If you’re thinking you need to get yourself some ninja-skills just to get through tax season, you’re in luck.

Matthew T. Whatley is the “Tax Ninja.” He gets points in my book just for having such a cool business name.

Beyond the awesome name, Whatley is a tax attorney in California, and has made a specialty out of serving the creative arts and small business community – including photographers. With tax season upon us, I thought it might be a good idea to talk to a photographer-savvy tax specialist while there are still a few weeks before April 15th.

“Because [the IRS] is doing more audits,” Whatley said, “people need to have better records and be more organized, and be able to support all of their expenses in an audit.”

Nobody likes, or needs, an IRS audit. I talked with Whatley yesterday (Monday, March 22) in his office in San Francisco and asked him to outline the most common tax mistakes made by photographers.

We caught the whole thing on video…

The 7 Common Tax Mistakes Made By Photographers

1) Not collecting state sales tax.

Photographers who provide a “tangible product” need to collect sales tax from their customers for the service that produced that product.

What’s a “tangible product?” Many photographers are confused about this.

“If you hand over a CD, if you hand over a thumb-drive, if you hand over any thing that is tangible, you just sold a product and as such you have to pay sales tax on products that are sold,” he said.

“At the same time, if you are a photographer and you don’t give them a tangible product, and you just FTP all of the photos that you take for a wedding directly to the client, you’re not actually turning anything tangible over to them so you might not technically have to pay sales tax on the services that you provided.”

“When it’s photography as a service, where you are shooting for somebody else and you hand over just your data, you’re kind of like a wholesaler at that point, so you don’t need to be collecting tax.”

 

2) Not saving receipts.

Saving receipts and keeping a journal of expenses is a lot of work, and as such, most photographers don’t deal with it. Instead, they’ll push this off until the last minute and then attempt to fill in the blanks later. There is a potential for disaster here, because IRS agents are trained to sniff out information that has been fudged, made up, or likely has little or no proof.

“Simply get a separate bank account or credit card that you use exclusively for business, and never co-mingle your personal and business expenses,” Whatley said. “In these instances, you can show your bank records to an IRS auditor and at that point they can see that they’re all business-related and that they all must be deductible.”

Photographers also drive a lot to perform their jobs, and can write off the milage they rack up each year. But they need to be careful about this, and keep records in a way that will stand the test of an audit.

“When you have vehicle milage, you are allowed to write off 55-cents per mile for all of the milage you drive for your business,” he said. “This does not include commuting to or from your studio, or to and from your principal place of business, but it does include all of the rest of the miles that you drive the rest of the year.”

In order to survive IRS scrutiny, Whatley recommends keeping a small log book in your car that includes the starting and ending odometer reading for each business-related trip, who you went to see, and why it was for business.

He also recommends keeping the same kind of records for camera equipment purchases, being sure to record the date of purchase, exact amount, and what type of gear it is.

Being armed with this information can make filing your taxes (and surviving an audit) much simpler.

 

3) Writing off the full cost of meals…

“They think that they can write off all of their meals that they eat any time as long as they are doing photography,” he said. “This isn’t the case. You have to have a directly related-to and necessary purpose for the meal to be a write-off.”

Acceptable meal write-offs include:

  • Discussing a particular business endeavor with a client
  • Schmoozing potential clients
  • You are traveling away from home (Travel requires that you be more than 50 miles from home and involve an overnight stay.)

“The IRS treats food differently than any other kind of business expenses because you have to set them off to 50%. So, in other words, If you have a $100 meal then you’re allowed to write off half of it.”

 

4) Forgetting about self employment tax.

As newspapers and magazines cut staff, more and more photographers are finding themselves in a freelance situation for the first time. Income tax works a little differently when you’re a freelancer, and not a full-time employee for a large company.

“Another thing that people don’t realize, when they become self-employed for the first time, is that the IRS collects social security and medicare taxes on your wages from both you and your employer. So you’re employer pays half and you pay half,” he said. “In instances when you are self-employed they have a thing called the “self employment tax”. This is 15.3% of your total income when you’re self employed. Which is a lot of money in addition to your regular income tax.”

“Photographers who are out there for the first time that make maybe $50,000, they’re going to pay another 6% in tax that they’ve never had withheld from their income in the past.”

Photographers should factor this into their rates and fees, and consider it a cost of doing business, and not a nasty surprise at the end of the year.

 

5) Improperly writing off home office rent.

This might be one of the biggest red flags on a tax return, so be extra careful how you approach this. Many photographers will attempt to claim their entire apartment or house for anything they do any business in whatsoever.

This is incorrect. Only a portion of the house can be written off, and only if it is used exclusively for business. I’ve even heard stories where an IRS agent will make a house call to see your home space for themselves.

“Saying that you have 70% of your house or apartment used exclusively for business is probably not true and probably going to draw you an audit.”

 

6) Being disorganized.

You will save money on preparation fees if you are more organized.

“The person who has a vehicle milage log, the person who has all of their expenses and all of their income categorized into all of the applicable tax categories in a detailed and cohesive list… their taxes may take 10 minutes to prepare,” he said.

“A person who is disorganized may take an hour or two hours to teach them how to get their stuff organized.”

“The people that have the second bank account have the advantage in this because they just look to that account for all of their expenses.

 

7) Using the EZ form.

“Using the EZ form will screw you every time because all it does is ignore all of the potential write-offs that you may have.”

Whatley describes a recent artist client who used the EZ form, and was therefore unable to claim the new 2009 “Making Work Pay Tax Credit” – which is a $400 tax credit.

“The tax laws change every single year, and Congress enacts new laws continuously that may save people money,” he said. “But the only people who save the money are the people who keep up on these new tax trends.”

Another often overlooked tax-savings opportunity involved writing off the payments you’ve made to the state on your federal return.

“The amount of state taxes that you pay, for example, to the state of california, if you make $100,000/year you may pay $7-$8k in state taxes. That total amount is considered an itemized deduction and can be written off against your federal income as an itemized deduction,” he said. “This may reduce your tax liability by $2,000 just knowing this.”

ps: Don’t forget the subscription fees for your photography website and online photo hosting costs are tax deductible business expenses.   Check out even more ideas on tax deductions for your photography business at Photo Attorney.

*PhotoShelter does not advise on personal income tax requirements or issues. Use of any information from this article or any other web site referred to is for general information only and does not represent personal tax advice either express or implied. You are encouraged to seek professional tax advice for personal income tax questions and assistance.

Looking for more business tips to improve your photography business? Over 23,000 photographers have download PhotoShelter’s free 2013 Photo Business Plan Workbook and used it to put together a concrete plan to avoid mistakes and run their business better.

 

 


About Matthew T. Whatley, Esq., the “Tax Ninja
Matthew T. Whatley, Esq. holds a Juris Doctorate from Golden Gate University School of Law and a Bachelors of Science in Social History and Japanese Language from Carnegie Mellon University, with additional coursework at Keio University in Tokyo and Mahidol University in Bangkok. Mr. Whatley is licensed by the California Bar Association.

Grover Sanschagrin is co-founder and Vice President of PhotoShelter. Follow him on Twitter at @heygrover.

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There are 46 comments for this article
  1. David at 1:23 pm

    A note on sales tax in NY State: My accountant tells me that when I deliver a DVD to my client, I have to collect sales tax on the ENTIRE JOB. Not just the cost of the DVD. I have to collect sales tax on my fee, expenses, etc, and anything else on my invoice, because all of that went into the final DVD. I asked him if I can just bill my client separately for the DVD as though it’s a totally different transaction, and just charge sales tax on that invoice. He said it probably wouldn’t stand up to an audit if it’s clear that a DVD is something I normally provide for that kind of photo shoot. The notion of collecting sales tax on my fees seemed weird to me, so we doublechecked with the NY Treasury. They confirmed that the entire invoice should be taxed. Incidentally, I have never had a client complain about the sales tax, even when it’s in the hundreds of dollars, although sometimes I’ve suggested digital delivery as a way they can save money, if the sales tax is getting too substantial for their budget. The New York chapter of AIGA (professional association for graphic designers) has a very good PDF about taxes for freelance designers in New York. A lot of it applies to photographers. The PDF is at http://www.aigany.org/services/assets/taxguidelines.pdf And they have a web page specifically about NY sales tax at http://www.aigany.org/services/taxes.php

  2. Phat Photographer at 11:03 pm

    Wish I had this four years ago. One other tip, photographers should contribute to a SEP retirement plan. As a small business you can contribute up to $49K to retirement and defer paying taxes on the entire amount.

  3. Nathan Clark at 12:22 pm

    Why wouldn’t you just set up a S-Corp or LLC and spare more of this headache? Granted there are other considerations, but you can fully reimburse yourself for any expenses you deem appropriate (keeping receipts, of course) and be freed from some of the more arcane rules like the 50-mile driving considerations. You get to pick your own mileage reimbursement too, so long as it’s reasonable.

  4. Aaron Hockley at 1:24 pm

    For tax issues, you need to realize that state and sales tax issues vary by location. For example, delivery of images by a download or FTP (given as an example above of not being taxable) is explicitly taxed in Washington state. In general, take state/sales tax advice with a grain of salt unless it was written specifically for the state in which you do business.

  5. Greg Ceo at 12:10 pm

    @David You and your accountant are exactly correct. If you deliver “Tangible Personal Property” to a client (such as a DVD,) then you must collect sales tax on the entire amount because the DVD represents the work from the entire shoot. However, if you deliver the images electronically, via FTP upload, you do not have to collect and remit the sales tax.

  6. Rebecca Benson at 10:33 am

    About #1…… Every state is different on what is or isn’t taxed with sales tax. It’s best to never take blanket advice on sales tax. See a tax professional familiar with your state’s rules or you might end up in trouble. Services where no tangible goods are delivered *are* taxed in some states.

  7. calanan at 1:19 pm

    FWIW, my business began in Utah and has since been restarted in Colorado. In Utah any/all sales where photos were delivered – including FTP, e-mail attachments, etc. – the department of revenue considered that to be tangible personal property and required sales tax to be collected. In fact, in 2009 the state sent self-audits to all photography business owners requiring back taxes to be paid with interest for the last 3 years. In Colorado a similar practise is being implemented by the state where photography business owners are being audited. While it hasn’t reached the point where all owners are being audited, it appears that the state is targeting some higher profile businesses. For example, see this recent ASMP Colorado post (and its link to a Denver Post article) about photographer Dann Coffey: http://asmpcolorado.blogspot.com/2010/03/state-cracking-down-on-photographers.html. Although I’ve not seen a specific mandate on collecting sales tax for what had been non-tangible property, like FTP transfers or even usage licenses, I wonder when a Utah-like sweep for more taxes will happen here in Colorado.

  8. David Brabyn at 12:08 pm

    And for procrastinators grabbing a copy of TurboTax at the last minute make sure you don’t pay full price. Bank of America let’s you have it with a 35% discount and don’t have to be a client: http://bit.ly/c9ea1V or go to BofA website, search for Turbotax and click on link on the left. Worked for me this morning. David — digitaltechparis web presence for photographers http://www.digitaltechparis.com/ Tel. +1 917 267 8492

  9. james at 6:31 pm

    What if my clients came to my studio with their own storage device (or shipped it to me) ? Since there is no tangible product & I am just transferring data (images) there should be no sales tax, correct?? Thanks for the great info!!!

  10. Paul Antico at 1:17 pm

    With regard to California photographers, I believe the Tax Ninja could provide some better sales tax info. His item number 1 on sales tax is incomplete and vague, likely because he is trying to accommodate different sales tax laws in different states. Anyone interested in a more detailed and accurate explanation of sales tax in CALIFORNIA ONLY should go to: http://www.apanational.com/i4a/pages/index.cfm?pageid=3847 and download the California Sales Tax Summary and Flow Chart.

  11. NYC photog at 12:48 pm

    Ok, I have done a lot of research on NY State Sales Tax for photographers and it is still as confusing as at the beginning! As per accountant advice, I collect sales tax on my whole photographer’s fee and digital post services, even if I FTP a client, but I do not collect on expenses I am reimbursed for. Only one client (editorial) ever disputed collecting tax like this. So I called the tax office and they basically were reading info from some tax literature that I could get online. Question, who knows the real deal? I would love to hear from a advertising and editorial photog who has been audited in the last few years, or an accountant/rep/bookkeeper/tax lawer who knows the biz. Thanks!

  12. JociJane at 7:12 pm

    If I have to charge a sales tax on an Album + the total cost of my photography service, what do I do when a client decides to buy another archival option 3 months later? 1 year later? Do I charge sales tax for the website they buy, or a second album + photography service again? Each time they buy another product that holds any number of the images I took? Can I charge sales tax on the photo service once even if it is on a separate invoice from the other items that may be bought at separate times? Thank You

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  14. Kimberly at 11:40 am

    Are both Travel Meals and Meals on a photo shoot (not catering) both only 50% tax deductible? Would lunch for a photo shoot be considered Meals & Entertaining or something different?

  15. Stephen at 11:10 pm

    @ David and NY photographers… photography services are not taxable in NYS.

    As a photography enthusiasts and a tax accountant, I feel the need to put in my 2 cents in here. Photographer invoices should separately state the photography service fees (labor), production expenses (camera, lights, eqpt rental, etc), and the cost for the actual photos. You do not charge tax on the service fee. Expenses can be taxable depending on the taxability status of the photos. The photos are tax exempt if delivered electronically or shipped outside the State. Photos are taxable if delivered onto a CD or other tangible formats and shipped in State.

    Photographer’s expenses for the production of photographs for sale in tangible format are tax exempt. This means the photographer’s invoice should tax its clients for the total expense plus the cost of the photos. Likewise, if the photographs are tax exempt, the photographer pays tax on all expenses and passes the entire cost to its client without tax.

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  17. Orcatek at 7:09 pm

    I find it easier to just collect sales tax on everything then guess on what is tangible any give time. Worse case is they will audit me and tell me I am over taxing (no fine or back tax penalty). The way they work it is, if you ask for advice, they give it to you, you follow it, then it’s wrong, you still pay the fine.

  18. Michael at 8:04 pm

    If you’re working in Arizona, you have to collect sales tax on everything you do, not just the tangible products, like prints or DVD’s.

    My accountant said that when photographers started doing everything digitally, the state realized they weren’t getting much revenue from prints or film anymore, so they started charging it on everything. So even if I shoot a job for somebody on my digital cameras, and then ftp the images to them, or have them download the images from PhotoShelter, I have to charge state and municipal sales tax on everything.

  19. Mark Jordan at 1:29 pm

    I was audited and had to pay several years in back taxes for not charging sales tax on portrait sessions and emailed digital files. Why? The State of California views the owner’s rights as property. That is, since I cannot do as I wish with my client’s images (primarily families), and they have the right to dictate how I can use the images I’ve created for them, they have in effect purchased property, regardless of where it is stored or the “tangibility” clause. Suffice it to say, anything and everything that I produce for my clients is taxed.

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  21. Erin Powers at 5:22 pm

    How do sales taxes enter the picture with online sales sites like photoshelter?
    I mean, I live in New Hampshire (no sales taxes), photoshelter is based (somewhere), and a customer in California buys my work from photoshelter.
    Is there sales tax due? To California? Or where Photoshelter is located? Who collects it and pays it? Me? Photoshelter?

    • Lauren Margolis at 11:21 am

      @Erin PhotoShelter gives you the ability for people to charge your clients tax, based on state or country if you need to, but you should always check with a tax professional for answers on what you “should” be doing, especially in terms of who you would pay that tax to.

  22. Maggie at 3:17 pm

    In Illinois, there is a 10% rule on sales taxes in which you only charge 10% of the sales tax amount. So say you are selling a print for $100. You multiply it by .095% (9.5% or current sales tax rate), and divide it by 10. So for a $100 product, the sales tax being charged to your client should be 95 cents. It is in the Illinois Sales Tax Manual. Those that live in another state, check with your CPA and make sure they know the rules for your state. A lot of CPA’s don’t know the rules for photography sales taxes so you might want to do your homework.

  23. NY Central Photography at 12:57 pm

    New York State

    ? If I charge a sitting fee- That is NOT sales taxable?
    ? If I charge a Print Order Fee where I charge a certain fee to order whatever size photo digitally through the internet and delivered from that company (me being the middle man) directly to the customer, do I collect and charge sales tax on my fee as well as photograph charge? i.e..

    I charge an order fee of $50 for me to place the order of an 8×10 photo from a company where I pay $10 for the 8×10 photo. I pay the sales tax on the 8×10 when I order it. Do I have to collect / pay sales tax on the $50.00, on the $10, or how do I figure that. If I keep everything digital, do I have to pay sales tax at all- and do I need to bother with a sales tax number?

    Right now I am just wanting to start out and would like to start out right, but NOT over pay or have a bunch of needless paperwork. With that said, I do want to have everything on the up and up – no issues down the road. What if I charged a sitting fee and gave a FREE CD of jpeg files? The way I see from above I would have to charge Sales tax on the sitting fee if I did it that way- am I correct?

    Help?!? Want to start out right!

    NY Central Photography

  24. fred jones at 4:53 am

    Charge $10 for the disk with sales tax. Services for Photography (Labor) is the main part of the bill. This way you don’t have to charge sales tax on your entire invoice.

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  26. Jenn Metzger at 6:40 am

    Hi, I have a question about the dvd or digital images and even albums. I have come across a few instances where these days couples are paying for their own weddings. So rather than the couple buying their parent’s a “parent album” as a thank you, the parents themselves often buy an album even when the couple themselves opt not to. I have also had several parents purchase the dvd of images. Do I charge them tax on the DVD sale? or the album sale? or do I have to really charge them tax on the entire amount of the service that was originally sold to the couple? and now if the couple comes and purchases an album after the fact do I just charge them sales tax on the album itself? or do I have to charge them sales tax on the original amount of services plus the amount i later charge them for an album?

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  31. Rod at 10:56 pm

    Thank you so much for posting this information. I just moved to California and the tax rules for self-employment are a bit different since here so I had to make a lot of adjustments. This really helped clear the fog!

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  34. Andre Friedmann at 10:31 am

    For New York State photographers, be *extremely* careful about implementing Stephen’s advice. I’m no CPA, only a NYC commercial photographer who uses one, and my CPA makes clear I can itemize all I want, but I don’t get to pick and choose which line items are sales taxable and which are not.
    Instead, if I deliver *any* tangible to a NYS client, no matter how small, it effectively poisons the entire invoice, making the entire invoice subject to sales tax. My CPA says there’s no legal way in NYS to ‘cherry pick’ individual line items for sales tax on an invoice. He says such cherry-picking is an Old Wives’ Tale among NY photographers, since the days of film and processing and printing.
    My CPA says photographers who cherry pick and are audited will be penalized into bankruptcy. Don’t get sales tax advice online. Instead, get a local CPA and get a ruling letter for your own workflow.

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  37. C Stylz at 10:06 am

    For Maggie in Illinois, you did your math wrong. You are right the sales tax is 10% but that means you are should charge $10 on a $100 product not 95 cent.

  38. LauraBohon at 10:43 am

    As far as online cataloging with a book to keep records of expenses, a recently designed
    program called ZEN99 , at Zen99.co has been a huge life safer for me as far recording income and expenses. It easily organizes and records information by month and even has a link to attach photos taken on your smart phone of your odometer.

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