The Tax Ninja, aka Matthew T. Whatley, has been helping photographers and other small business owners in the arts manage their finances since 2004. The Tax Ninja is very well versed in the issues photographers encounter when it comes to write-offs and income declaration.
Matthew chatted with us about common tax mistakes professional photographers make, how they can prep now to save money later, and when to invest in new gear. According to Matthew, becoming a tax ninja isn’t all that hard: “It’s not a question of teaching somebody, it’s a matter getting them to actually do it and change their habits.The more people participate in the organization of their own data and the preparation of their tax re- turns, the more they learn how things work.”
1. First, get organized.
The first step in becoming a tax ninja yourself is getting organized. Save receipts and keep accurate records of your expenses (and above all, schedule time to do it). For those in the U.S., the easiest thing to do, says Matthew, is to open a separate business account. Use a credit card associated with that account for every expense. Now is the time to really assess your business. What are your expenses? What are your tools? What gear do you have, and what do you need? Where is your office (in the kitchen or local coffee shop), and how are you getting there?
- Open a business account (separate bank account, separate credit card). Use the bank card or credit card for any and all business-related expenses. This way keeping track of your expenditures will be greatly simplified. “So that you can tell us,” says Matthew, “if you spent $3.95 at Walgreens and whether you purchased paper clips for your business or a couple of sodas. You won’t miss any of the minor details.”
- Keep a mileage log in your car (looking back through your calendar or email at the very least can help figure out where you went and why). “Unless you use a vehicle 100 percent for business, you’re not going to be able to write off all the costs of the vehicle. You’re going to have a personal versus business amount of write-off,” says Matthew. So when you’re heading to a job, start counting.
- Keep track of the details: It sounds simple, but be aware of exactly how much you’re making and how much you’re spending—even if it’s paper clips and envelopes. “The sum total of all the little things are usually what saves you,” says Matthew. “That’s where you get 10 to 20 percent tax savings out of your preparation.”
2. Know your write-offs.
This is what stumps photographers the most. But figuring out what you can and can’t write off can be as simple as reviewing an itemized tax form. If you want a little help, check out the Tax Ninja’s form. “The general rule is, if it’s ordinary and necessary for your business and the generation of its income, it can become a write-off.”
- Write off all meals on a business trip when you travel over 50 miles from home.
- Only write off meals that directly relate to business—schmoozing clients or taking a client to lunch.
- Write off the correct percentage of your home for an at-home office. If you keep a room with no personal use items (your DVD collection or that NordicTrack you still need to offload) then you can write-off the proportion of your business use of your home. If it’s a quarter of your living space then you can deduct a quarter of the rent…and the utilities, and the cleaning bills, and your Internet, trash collection, etc.
- Combine work and play. Are you going on vacation but intend to build your portfolio of stock images by taking pictures each day? That could make it a write-offable trip. “An example of that is a food blog,” says Matthew. You photograph and blog about everything you eat and drink. Or, maybe you’re learning cinematography by reading an industry magazine or watching an online tutorial you had to pay for. Yep, write that off. As Matthew says, as a general rule, “Think in advance how you’re going to make it an expense.”
3. Educate yourself, and then get someone to do it for you.
Know how best to file—should you be an LLC or a sole proprietor? Most photographers, says Matthew, don’t need to incorporate (become an S Corp or LLC). There’s no requirement to incorporate to start writing things off. Matthew says that taking out business insurance for $300 will be a more reasonable investment for most photographers than creating an LLC.
Know what sales tax you should be paying as well as what kind of license your city requires. If you’re delivering “tangible goods” (a print, say), then you probably have to charge sales tax. Make sure you have a local license to collect tax, otherwise you could get slapped with a fine.
- If you’re completely self-employed, file on a quarterly basis so that you can accurately pay your estimated taxes. “If you don’t pay quarterly, you have to pay a penalty for failing to pay quarterly, which is two percent of the tax due.”
- Find an accountant. If this all sounds daunting, no need to fret. “If someone is afraid of doing something, they should have someone do it for them,” says Matthew. Start by asking friends or searching online at peer-reviewed sites (Angie’s List, Yelp.com). When you find someone who looks good, ask how long they’ve been in business, how much they know about the business of photography, and how much they charge. This can vary quite a bit.
- Read and become familiar with a Schedule C, which lists deductible items.
- Invest in gear wisely. Matthew says that often photographers get “gear happy” and buy more than their busi- ness really needs. Sometimes, depending on the size and scope of your business, renting gear and writing it off at the end of the year is a far better strategy. “If you’re making $50k in year one but next year you plan on making $100k, you should probably wait to purchase your gear until next year simply because you’re going to be in a higher tax bracket,” he says. Then when your business grows and suddenly you need to write off large ticket items, you can buy that $10k lens knowing you’re satisfying your business and tax needs at once. And you can invoice for the rental of the gear, mark it up, and make some money. Says Matthew, “Knowing when to spend your money is one crucial factor.”
4. Build contracts.
“The most important thing to deal with in a contract is getting paid: who’s suppose to pay, when they’re supposed to pay you, and how much. And, having some kind of penalty associated with not paying you,” says Matthew. So build “teeth” into your contracts. What does that mean?
It can mean that when you deliver a contract to potential clients, some- where in there it states the legal ramifications of nonpayment, including how legal fees will be reimbursed if you need to go down that road. It could also mean that you write into your contract how much the clients agree to pay in late fees if they don’t pay on time. Make sure to define what services you’re performing—and avoid “scope-creep,” which is a client asking for more and more without paying extra.
If you’re doing the hiring and paying a subcontractor more than $600 a year, know that you have to file a W-9. Make sure your subcontractors know this before they start working for you.They may think that they are working “under the table” and won’t be taxed, but you could be left with a serious fine if you get audited by the IRS or state or local tax authority.
- Learn or have someone help you build a contract with “teeth.” Your best bet is to have a lawyer help create a “boilerplate” contract for you that you can then customize for each new client. If you’re interested in learning
- industry standards for pricing, copyright, and licensing, the American Society of Media Photographers has some great resources.
- Ask for example contracts your photographer friends have used and highlight sections that are common among them. You can also find examples of contracts by searching online.
- Find out from the start—i.e. before hiring—whether you’ll need to consider your assistants as subcontractors, independent contractors, or employees. If you have someone working for you every day, all day, and aren’t claiming them as an employee, you might be in for a nasty fine.