While there are many perks to being your own boss, being self-employed creates additional responsibility. Most people who are employed can simply plan to make sure they have enough income tax withholding from their paychecks throughout the year. On the other hand, for those who are self-employed, ensuring that they have paid all their necessary income tax is not so simple. I have met with numerous self-employed taxpayers who are blindsided by self-employment tax and end up owing anywhere from $5,000 to $20,000 in taxes. Trust me, you do not want to be in the position to experience that burden. To assist in avoiding large income tax burdens we will discuss some self-employed tax tips. While most of these self-employed tax tips will be general, there will be some focus points specific to photographers.
Can I do my own taxes if self-employed?
In most cases I would not even advise the average person who is not self-employed to do their own income taxes, so you can imagine what my answer is to this question. The reality is that self-employed individuals “can” do their own taxes, but I wouldn’t recommend it. There are just too many things to consider, which is why it’s better to have a professional do the work for you. You want to make sure that you don’t leave any money on the table that you could have otherwise saved in taxes. You need to do this while also making sure you’re not doing anything that might draw the attention of the IRS and cause major financial issues in your world. Check out another blog post that gives more details on why you should not be doing your own taxes. https://molentax.com/7-reasons-to-stop-doing-your-own-taxes/
What are common self-employment tax deductions?
I am going to list some of the common self-employment tax deductions for all, and then a list that is specific to photographers. The most important thing to remember is that any expense for your business must be ordinary and necessary or common expenses for your trade or business. See the link below for more details like business use of home or business use of your car. https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses
- Vehicle expenses- Achieved by keeping a mileage log of trips associated with your business. The standard mileage rate for 2020 is 57.5 cents per mile.
- Office supplies- Businesses usually incur office expenses. Things like pens, paper, postage, and printing are considered office expenses.
- Phone/Internet expenses – Communication is an important part of business, and internet usage in today’s business world is a must. Only the percentage of your phone or internet for business use is deductible.
- Advertising –Expenses incurred to promote your product or service are deductible.
- Job supplies –These are items purchased that you use to produce income in the operations of your given trade or business.
Want more? Follow the link for a list of general business income tax deductions. https://molentax.com/wp-content/uploads/2020/02/General-Business-Income-Tax-Checklist.pdf
Photographer Specific Deductions
- Equipment Expenses – Things like cameras, camera stands, lights, or props are examples of equipment expenses for photographers.
- Studio/Venue Costs – Expenses for studio or venue space that you may rent, or purchase are deductible. Also, any additional expense that arise from the studio or venue space such as electricity or insurance.
- Training/Education – Expenses associated with weekend seminars, tuition for a formal photography degree, a business coach or mentor are deductible. Any travel or lodging associated with partaking in the training or education mentioned is also deductible.
- Trade magazine subscriptions.
- Software expenses.
What is self-employment tax?
Self-employment tax is made up of Social Security and Medicare taxes. The self-employment tax rate is 15.3%. Those who are employed pay their Social Security and Medicare taxes automatically through their payroll and normally never have to consider it. Also, half of the tax is covered by their employer. For those who are self-employed, there is no employer to cover half of the tax because they are their own employer. For the very same reason, self-employed individuals can deduct the equal portion of self-employment tax that an employer would normally pay. The remaining amount is added to whatever amount that was computed for your ordinary income tax. See the following link for more information on tax considerations for businesses, and self-employment tax. https://molentax.com/tax-considerations-when-starting-a-business/
How do I reduce self-employment tax?
Self-employment tax is computed based on the amount of net business income you have for a tax year. That is, how much income you have after deducting all expenses for tax purposes. Considering this, the way you reduce your self-employment tax is by limiting the amount of excess income remaining at the end of the tax year. Now, if your business is just knocking the ball out of the park, then it is not necessarily as simple as spending as much money as possible.
For situations like this you may need to consider changing your entity classification. I will not dive into the entity election topic now, but I just wanted to mention that self-employed tax tips can go much deeper than just how much did you spend. Ultimately the answer is tax planning. Working with a professional tax adviser throughout the tax year is the best way to make sure you do not get hit with a large self-employment tax burden once the tax year is over. By keeping up with where you are throughout the year, you can make year end decisions on business expenditures that you need or really want to make that will help you decrease your net business income.
How much should I set aside for self-employment taxes?
The answer to this question is it depends. The most important variables for this question are; how much revenue and expenses you have and is there other income to be considered outside of the self-employed income? As stated earlier you will owe about 7.65% or half of 15.3% in self-employment tax in addition to ordinary income tax on the net income of your business. If you also have other income such as salary and wages or short-term capital gains, you must consider that income as well because your net business income is added to those amounts increasing your ordinary income tax. An important self-employed tax tip, leave the tax estimating to the professionals. It is better to spend money on a deductible expense for tax planning than to try to estimate the tax yourself and grossly miss the mark. It is worth mentioning that in some cases making estimated payments might be necessary to make sure you are not hit with a penalty when you file your taxes.
I hope that the information I have presented here is helpful for self-employed photographers and other self-employed individuals. The information I have given is not the end all be all, there is much more to be considered on these topics. It is best to consult with a tax professional for the best outcome regarding self-employment tax. Be sure to speak with a Molen & Associates tax advisor or schedule a tax consultation if you have further questions.
Arthur Harrison, EA
Tax Advisor, Accounting