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Here at FOR STRUGGLING CREATIVES, we crafted a quick and simple breakdown on how to file your taxes with some info on due dates, deductions, and regulations.
The first thing you need to know is that the government passed new regulations so that the 2020 federal tax filings are due May 17th, 2021.
Not only does the federal government, but specific states like New Jersey & New York also require you to file income taxes. Check to see if your state requires income taxes here: https://www.investopedia.com/financial-edge/0210/7-states-with-no-income-tax.aspx.
When it comes to the IRS, there's so much ambiguity, confusion, and regulations when it comes to filing taxes as a creative, but there is one simple question you have to answer first:
The IRS defines a business as an activity that is carried out with the reasonable expectation of earning a profit. They define a hobby as an activity that is not for profit.
Here are some simple questions to help you define your creative works:
If you are an independent creator, you most likely will file as an "independent working artist." This means you will be considered a sole proprietor (the only owner) of your business. Certain restrictions and limitations apply, so make sure to read about them here.
You would most likely also be considered as "self-employed," which has specific deductions and regulations. Learn more about self-employment here: https://www.thebalancecareers.com/differences-between-employed-vs-self-employed-2062139.
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Tax deductions are a way to pay fewer taxes by "writing off" (subtracting the amount of the expenses) expenses that you paid out of pocket to produce those creative works. Deductions can include marketing expenses, agent/management fees, travel expenses, material costs, art gallery rentals, education, certain subscriptions, and normal business expenses. If you work from a home studio, you may even be able to deduct a portion or all of your rent, utilities, and meal costs. You can also write off business-specific costs like business insurance, depreciation (the loss of value over time) of equipment, interest paid on credit cards, repairs/maintenance, and any contract labor used.
Most of these deductions will operate as a "pass-through deduction." This means that the profits are taxed on the owner's individual tax returns at their specific tax rate.
The tax rate is based on a specific bracket of income. The more you make, the more taxes you have to pay (generally). With new regulations, artists considered a pass-through business can deduct an amount of up to 20% of their net income from their creative activities if the revenue generated is less than $315,000 (joint filing) or $157,500 (single filing).
Another critical thing to know is that any stimulus checks or government assistance have to be calculated alongside your income.
This allows you to keep track of your expenses to write them off when it is tax time.
Gross income is what the IRS uses to determine your tax rate, and this will allow you to easily track your possible deductions.
Most of the income generated from creative works is untaxed when you receive it. By setting a portion of money aside from each project, it can allow you to quickly pay off your end-of-year taxes.
If someone sells your work for you, make sure to get a 1099 form from them. You would file that separately from a 1040 Schedule C form. A 1040 Schedule C form is used to report sales revenue and expenses related to your creative activities. All the money you make goes on line 1, and all the money you spend goes on line 4. If you sold creative works on your own, you could report the revenue generated as "income". For more information on what form to file, click here: https://www.bankrate.com/finance/taxes/picking-proper-1040-tax-return-form.aspx
Taxes are overly complicated, and the system is made for people who know the most information to benefit. The governments give the biggest tax deductions to businesses that have the most expenses.
Filing your taxes as soon as possible allows you to not only stop worrying about it but, if there are any errors, enough time to correct them and re-file your taxes.
There are many services out there offering to assist you with your taxes.
At FOR STRUGGLING CREATIVES,
we spent time combing through the different services, so you don't have to. Here is a list of the best services to assist you in filing your taxes.
The IRS allows you to compile and file your taxes for free online. This process can be complicated but is the most direct way to file your taxes.
H&R Block is a reputable and simple tax processing service. They will connect you with a tax expert who can assist you in filing your taxes and get the maximum deductions. They also offer free state income tax filing if you meet certain qualifications.
Turbo tax offers free Tax returns for individuals with a simple tax return. TurboTax is the leader in online tax filing and has been servicing people for many years.
Never stress over taxes, be prepared, and take advantage of the system!
With this info, it can be easy to calculate your deductions, compose your tax forms, and file your taxes.
At FOR STRUGGLING CREATIVES we are committed to helping creatives and creating a culture of helping.
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