The topic we love to hate, but what we need to know, taxes 101 for photographers.
Today, we are going to discuss:
All things taxes 101 for photographers.
Are you supposed to do a sole proprietorship or register your business as an LLC? This is actually pretty much up to you and what you decide, but I want to explain the difference.
The main difference between a sole proprietorship and an LLC is that an LLC is something that you pay for, and it will help protect your personal assets. This is in the event that your business was to be sued, or suffers a loss. So, your home, your vehicle, your money and other personal bank accounts, etc.
Let’s say you’re currently working in a different full-time career while building your business on the side, what you need to do is keep track of the income coming in and the expenses going out for your photography business. From there, you’re going to report those numbers on your personal tax return if you choose to be a sole proprietor. You’re letting the IRS know you work for someone else, but you’re also earning an income through your photography business as you build too full-time.
This is where the whole idea of bookkeeping comes into play. It’s really important that you treat your business as a business; you not only step into the photographer role, but you also become the business owner, and as a business owner, one of your responsibilities is to know what’s coming in, what’s going out and what your net income is (your profit, this is what you’re taxed on) You need to know your numbers, and you should be comfortable finding them + knowing them. This is truly how you’re going to set yourself up for success.
You have to know your numbers, or you’re not going to know how you’re doing in your business, you are going to make decisions based on how well your business is going.
Here’s the formula that you need to know, you need to know your income, which is the money coming in this is called revenue, this is all the money flowing into your business, what you are making sales on this is your sessions, you’re printing, product, sales and any other form of income you have. Then we’re subtracting expenses. Expenses are what you need in order to make your business run, and there are a ton of categories for this, it depends on your business.
So, income – expenses = profit (that’s the number left over at the end of every month).
How do you know what your tax percentage is?
The legal correct answer would be that you ask your CPA or your tax accountant. Typically, though, it falls between 20% to 30%. I would land between 25% and 30% if I were you, that’s a very safe bet. So, let’s say out of the $1500 profit you made in a month, you are setting aside 25% for taxes. All you have to do is take your profit ($1500) and multiply it by .25, and that will tell you to set aside $375 for taxes. the remaining $1125 leftover is your profit AFTER taxes.
Income – expenses = profit AND THEN profit x .25 = profit AFTER taxes.
So, the next thing I do with this number is create a business budget
The first thing I want to bring up here is that we never make a steady income. It’s not that you can’t be profitable, month to month to month, that is totally possible. You can also have consistent clients, but you’re not getting a set paycheck like you would at a ‘typical’ job. If you’re an employee working at a job, you usually have a set salary, you have some type of a set take home pay, you don’t have that when you run your own business and you’re being an entrepreneur, it’s going to be very rocky, very up and down. This is normal, 1,000% Normal.
Okay, the first thing I do is instead of telling myself, “I’m gonna pay myself $750 a month”, I set it up as percentages. That way, no matter what the leftover number is, all I have to do is plug in the given percentages and send the money where I need it to go.
Should you pay taxes quarterly or annually?
If you pay quarterly taxes, which means you’re paying before it ever is tax time, you’re making prepayments, this is called estimated taxes. So, you look at the previous years, and pay an estimated percentage of taxes every quarter based on your annual earnings in the year(s) past. If you don’t have a full year of doing this, you’re going to take your income goal and from that, set estimated payments each quarter based on what you think you’re going to earn.
So, simple math here, if you’re wanting to bring in $30,000 for the year, and you are saving 25%, you’re going to take 30,000, multiply it by 25% in taxes, and then divide it by four, going to divide it by four, because there’s four quarterly payments to do. So, if you divide that by four, then you’re going to estimate that you’re going to pay in $1,875, at the end of every quarter when those payments are due, you’re prepaying it.
Annual income x .25 and then divide that by 4 = ($1875) the estimated prepayment you’re making to the IRS every quarter.
The Small Business Starter Kit with Katie Farrow.
From Broke to Booked Blueprint Program
Looking to dive deeper into taxes for photographers, tune into the Book More Clients Photography Podcast today!
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