Financial Management for Self-Employed Artists and Freelancers

1. Financial Management for Self-Employed Artists and Freelancers • By: Jennifer Gentry • MS Accounting • MS Finance

2. Contents: • Introduction • Being Self-Employed • Keeping Records • Taxes & Being Self-Employed • Planning Future Cash Flow • Where to Get Help

3. Introduction: • As a visual or performing artist, you may have income from sources outside an employer. • If you have income of even $1 from self-employment, tax law requires that you report this income and subtract any expenses. • It is important to keep accurate records

4. Being Self-Employed: • Income is generated from: gigs, private teaching, commissions, selling music, photography, art objects etc. • Income you receive from a business of $600 or more must be reported to you and the IRS by that business on Form 1099-MISC. This differs from a W-2 which is what you typically get from a primary employer. Not all businesses send out 1099-MISC, but you are still required to report the income to the IRS • So you MUST keep your own records

5. Keeping Records: • Managing your money means keeping accurate records. • Track all self-employed income. • Track all self-employed expenses. • Expense receipts are important. • Generating losses from self-employment?? • The IRS does not like losses, so if your expenses are greater than your income then the IRS might consider this to be a HOBBY and disallow the loss. • Accurate records and documentation of expenses is one factor that helps you argue that the activity is not a hobby. Other factors include advertising, business plans, and other facts indicating you intend to make a profit.

6. Allowable Expenses: • Accompanist fees, substitute fees • Agent/management fees • Business gifts ($25 per gift allowable) • Concert dress, stage cosmetics (deductible only if unsuitable for wear elsewhere) • Demo tapes, recording fees • Health insurance (not employer provided) • Instrument repairs and supplies • Lessons • Meals (only if business is discussed) • Mileage (if driving personal car; dates & distance) • Music, manuscripts, related books, periodicals, magazines, etc. • Printing • Publicity, photos, brochures, portfolio or press kit materials • Recital expenses (hall rental, equipment rental, rehearsal space, cartage, promotion, etc.) • Supplies (art, office, postage) • Travel (plane, bus, taxi, tolls, lodging) • Tapes, recordings, equipment, etc. • Telephone (% for business or actual) • Tickets to concerts • Union dues and initiation fees

7. Tracking Income & Expenses: Keep Receipts: • Important for proof of an expense. • Use your own filing system, with folders or files for each category or vendor. • This information has to be summarized after year end by type of expense. • It is advisable to track your expenses monthly if you want, as it is easier to record expenses when the purpose and nature of the expense is fresh in your mind.

8. Checks: Checks can serve as documentation for your expenditures. Write the check number on the receipt. Set up a separate self-employment checking account. Get in the habit of bringing your records up-to-date once a month; a good time is when you get your bank statement. This will ensure that you have an accurate record and, more importantly, you will always know where you stand financially.

9. Datebook/Calendar: • Tracking some items without receipts: • Gas • Mileage • Parking fees • Tolls • Business meals under $25 • These notations may suffice for keeping a record. Simply enter the amount you spend or number of miles driven on the appropriate day. • At the end of the year, add up all your business expenses by category to be entered onto your tax return.

10. Ledgers (manual or Excel spreadsheet): • A ledger is an ongoing written record of your income & expenses. • For income you need to show the date, who paid you and what type of income and amount. • For expense you need to show the date, check # or cash received and description or type of expense and amount. • Set the ledger(s) up manually or on an Excel spreadsheet.

11. Sample Income Ledger:

12. Sample Expense Ledger:

13. Self-Employment Automobile Deductions: • You have to keep records for automobile expenses for travel related to self-employment. • You have the choice of actual expenses or mileage. Once you choose, you have to use that option every year until you get a new car. • Mileage is easier to keep track of and the IRS sets the mileage rate each year-currently 56.5 cents per mile. • Actual expenses include tracking all gas, repairs, insurance, etc. for the auto. You must also track the total miles the car has driven for the year, plus keep track of your business mileage. The percentage of business miles versus total will be multiplied by actual expense to come up with your deduction. • You have to be careful not to considered commuting miles as business miles as these are not deductible. • If you do have a regular job besides your self-employment, then your auto miles can begin from your home address. • Same as if you have a home studio, you can deduct miles from your home.

14. Taxes & Being Self- Employed: • You must pay estimated taxes (Federal and State) if withholding on wages does not cover your total tax. • You will need to plan (budget) what you expect to earn for the upcoming year. • Self-employed people are more likely to be audited because: • Cash receipts are not always reported • 1099 MISC income is not reported • Non-deductible expenses are taken • It is very important to keep records (logs/ledgers/date books) for automobile mileage/expense as proof in an audit. This means you must keep a log of business, commuting, and personal mileage. • You are strongly advised to consult with an accountant

15. Future Cash Flow Plan: (The Budget) • Planning what your future income and expenses may be may seem impossible. • Simply estimate how much you will earn (a good guess)and spend over the course of the coming year. • The more familiar you are with your financial situation, the more precise your plan will be. Consequently, if you keep up-to-date financial records, you will have more information at your fingertips to use as a basis for budget predictions. For example, after keeping ledgers for one year, you can then take totals from past experience and add to them where you anticipate expenses and income to increase. • A plan/budget is a tool to help you make decisions about your present and future; a means of forging your career in the direction you want.

16. Where to get help: • Tax software • Accountants (CPA) • Commercial Tax preparer • Volunteer Programs (VITA or API) • Software costs around $30-50 • Accountants (CPA) costs $100 or more per hour • Commercial Tax preparer (e.g., H&R Block) charge per tax schedule. • Volunteer programs offered at local libraries

17. A national network of accountants who work on volunteer public service projects. Their work helps non-profit organizations and small businesses and individuals who cannot afford professional accounting services. API affiliates are in major cities across the country. Programs and eligibility vary; some APIs never charge for accounting services, although a few do charge small administrative fees on a sliding scale. API focuses on service to non-profits or small businesses, so you are advised not to contact them until your financial situation becomes somewhat complex (i.e., 3 or 4 sources of income, extensive professional expenses, etc.). Contact Accountants for the Public Interest (National Office), 888 17th Street, Northwest, Suite 201, Washington, DC 20006 (202) 347-1668. Accountants for the Public Interest (API):

18. Enjoy Being Your Own Boss!