Sunlight Tax

Estimated Quarterly Taxes for the New Freelancer (Part 2/3)

Welcome "Tax & Money Stuff" a column in partnership with Hannah Cole. Hannah is a tax expert who specializes in working with creative businesses and artists. A long-time working artist, the financial challenges of freelancers and small creative businesses are both relevant and personal to her. She is the founder of Sunlight Tax. Read her post about saving for retirement here.

With Hannah's unwavering expertise, we created the online course: The Ultimate, Honest Guide to Understanding Artist Taxes. It's a clear, motivating 60-minute online class that demystifies what your tax responsibilities are as an artist.


Guest Post by Hannah Cole

In my last post, I addressed a common dilemma for the new freelancer - an unexpectedly large tax bill in April. I explained self-employment tax, and why it catches so many people off guard. In this post, I’ll explain estimated quarterly taxes, which are the solution to that huge April tax bill.

You’ve newly struck out on your own, and you had your first profitable year as a freelancer. Congratulations! But when you prepared your taxes, you were blindsided by the enormous tax bill. You got a crash course in self-employment tax, and now you’re ready to set yourself up better for next year. It’s time for estimated quarterly taxes.

Last Love Song , Silica and Pigment on Linen, 24" x 20", 2014, by  Matt Phillips

Last Love Song, Silica and Pigment on Linen, 24" x 20", 2014, by Matt Phillips

Estimated Quarterly Taxes – What They Are

Our tax system is called “pay as you go.” If you’re employed, your employer withholds taxes from your paycheck each pay period, so that at the end of the tax year, you should have already paid in approximately the amount of taxes that you owe. When you overpay, you get a refund, and when you underpay, you owe some more tax on top. But the idea is that you don’t pay all of your taxes for the year at one time - for almost everyone, setting aside that much money would be difficult.

When you freelance, there’s no employer to withhold tax for you, so it becomes your job. (Yes, another burden of the gig economy). Everyone knows, and that includes the IRS, that it’s much harder to pay one big bill than several small ones. So to approximate the withholding situation of an employer, the IRS requires freelancers who owe at least $1000 in tax to make estimated quarterly payments.

It may seem yucky to have to pay taxes four times a year instead of just once, but it’s a good thing. Breaking it up into quarters makes the payments much easier to handle. And you avoid an unpleasant surprise in April.

What are the deadlines?

April 15, June 15, September 15 and January 15

How much do I need to pay?

Generally, you need to pay in 100% of the tax you owed in the previous year, broken into four installments. If you meet this threshold (called a “safe harbor”), you generally avoid penalties and interest. If you make over $150,000 in adjusted gross income (or $75k if you are married filing separately), then you must pay 110% of last year’s tax.

You can find this amount by looking at last year’s tax return. Be sure to look at the line that states your total tax for the year, and not just the amount you owed when filing. Take this total tax number, divide it by four, and that’s each estimated quarterly payment amount.

Traci Talasco ,  Juggling Act: Various States of Balance and Imbalance , 3/4" plywood, interior paint, dollhouse furniture, (4) 12 x 12 inch panels, 2012.

Traci Talasco, Juggling Act: Various States of Balance and Imbalance, 3/4" plywood, interior paint, dollhouse furniture, (4) 12 x 12 inch panels, 2012.

What about the huge variations in my income year to year?

Good point. You’re a freelancer. You have great years and not-so-great years. If you expect to make substantially less money this year than last, and don’t want to pay more taxes in than you need to, you are allowed to pay 90% of your total tax due for the current year in four installments.

But how do I know what my tax due will be this year, since this year hasn’t finished happening yet?

A fine point again. That’s why most people choose to pay 100% of last year’s bill. It’s much easier to calculate. But you are the best person to make an estimate of how good your income will be, and if it is truly going to be much lower this year, you are allowed to base your estimates on this year’s income instead of last year. 90% of this year’s total tax due is a “safe harbor” amount - meaning, so long as you have paid at least that much, you will not be assessed any penalties or interest.

So paying estimated quarterly taxes of 100% (or 110%) of last year’s tax or 90% of this year’s tax keeps you safe from penalties and interest. Excellent.

But you can still be hit by an unexpectedly high tax bill in April if your income is higher this year than last. This is where the word “estimate” is extra relevant. Estimated Quarterly Taxes are just that - estimates. The IRS does not expect you to predict the future perfectly. (But if you can, expect a call from me for some stock tips). There’s no one in a better position to judge whether this is a good money year or a bad one than you. So if you just hooked a big client or got an advance on your novel, it’s a good idea to increase the amount of estimated taxes you pay in. You can increase your payment or make an extra payment at any time. And it’s better to do it as the income comes in than later. We’re all human, and money tends to get spent, so make an extra payment right when you get the big check. Don’t wait until it’s disappeared into bubble gum and comic books.

One last point. Remember state taxes. States vary. Many don’t require estimated quarterly taxes (some do!), but don’t forget that you will still owe them money (unless you live in one of the handful that don’t have income tax).  A good practice is to look at last year’s state tax owed, and set that amount aside. You can do it in chunks, as income comes in, or divide that number by 12, and put aside that amount each month into a separate bank account. That way, when you do get your April tax bill, the money for state taxes is there for you.

Estimated taxes take a little getting used to, but once you’re in the rhythm, they’re not so bad. The key is to become familiar with calculating (and recalculating) them, setting aside enough of your income in a separate account, set the deadlines on your calendar, and make paying them a habit. In my next post, I’ll discuss the methods of paying estimated quarterly taxes; what your options are, how to estimate what to set aside, and some tips to help your cash flow.

Hannah is a tax expert who specializes in working with creative businesses and their owners. A long-time working artist, the financial challenges of freelancers and small creative businesses are both relevant and personal to her. She is the founder of Sunlight Tax. follow Hannah on Twitter at @sunlight_tax, or sign up for her newsletter to get friendly, timely updates about money stuff for creative people.

 

 

 

Disclaimer: This is meant as a guide, not professional advice. If you have questions about your own situation, talk to a tax professional.

This post was originally published on August 4, 2016

© 2017 Kind Aesthetic, All Rights Reserved.

Artists, let’s talk about money.

Artists can have a lot of hangups around money. Money can be a sensitive subject regardless of industry, but it especially seems to be in the arts. It can be hard to put a number on an idea, a talent, or a piece of art that has no comparison.

The relationship between money and art is complicated. Common thoughts are:

  • How does one put a monetary value on fine art?
  • If I sell products, does that devalue my art work?
  • If I want to be paid for my work, does that change the reason I am making it?
  • I do other things besides sell my art. Does that mean I am not a real artist or art business?

But guess what? All artists deserve to be paid fairly for their work.

“We’re trained to feel that it’s impolite to discuss money. In the art world, [often] the person we are dealing with, be it a gallery director or curator, has a broad view of a whole bunch of different artists and [can see] where we fit in among them. But if we as artists are not talking to each other about money, we are not operating with as much information as they are. So I think that artists should to talk to each other about money. They should be open and transparent. And the more we promote the culture of transparency around money the more it helps everybody. Sharing this information with each other IS artist empowerment.”

- Hannah Cole of Sunlight Tax, from the course The Ultimate, Honest Guide to Understanding Artist Taxes

Many of us have the goal of selling our work, but remember that sales are usually not the only way an artist makes money–even the most well-known and successful artists often do more than just sell their work to survive. Thinking nimbly and branching out about how you earn money to support your practice will help you to achieve success.

Ways to earn money that aren’t sales of work include:
Grants, residencies, teaching, speaking fees, public art commissions, private commissions, commercial art (maybe you are a painter who sometimes sells illustrations to magazines and websites), sales of editions or multiples, writing, design work, and the list goes on and on.

The good news is, that if you are doing any of these things already, they bolster your business and support your practice! Artists should be honest with each other about what all they do to support themselves and their work. It’s revealing, but also super inspiring, to learn that our peers have various gigs and structures in place. Everyone’s path is different and unique, and we can all learn from each other. It also might remind us that choosing our own path will lead to our own versions of success.

So, what is your story? Take some time to list all of the ways you support your art business and how these experiences have shaped your practice, expanded your network, and influenced how you spend your time. We are in the same boat as many of you and do lots of things to support our individual art practices: creating blog posts, helping artists by leading classes, workshops and individual coaching, and selling our services. Sara also teaches, and Andrea does commercial photography. We seek out grants and residencies. We’re busy, yes. But this stuff fuels our connection with our art-making and our community at large.

Check out our videos from DELVE: Comedy + Art, a networking event where artists Alex Gingrow and Michael Scoggins share their unique stories.

We’ve seen that if you can harness the storytelling potential of your experiences to share your practice, then you are well on your way to an effective marketing campaign to grow your audience! And once your audience grows even further, you have even more ammunition in support of yourself not only as a professional artist in the eyes of the world, but also as a viable business.

© 2017 Kind Aesthetic, All Rights Reserved.

The Ultimate, Honest Guide to Understanding Artist Taxes

Whether we like it or not, tax season awaits. We figured why not embrace it by getting empowered with a ton of knowledge about taxes, money, and what that means for us as artists? You should join us. It'll be fun–We promise!

We know we've had questions for years about taxes and Schedule Cs and all that stuff. We talked about it with friends and colleagues, who also felt themselves shrink away from the topic with confusion. That's why we are so excited to bring you a brand new online course called:

We have teamed up with artist/tax expert/wonderful human Hannah Cole of Sunlight Tax to demystify your tax responsibilities as an artist. Hannah speaks clearly, without jargon, and explains tax concepts in plain English.

We met Hannah in Brooklyn – she now resides in North Carolina – when her studio was down the hall from ours. An amazing artist, she got licensed as a tax expert and specifically works with artists and creative businesses because she gets it, she gets us, she is one of us! Hannah is a totally smart, badass woman and we couldn't be more excited to be collaborating with her.

With a better understanding of your money, we hope to help your art business grow. With Hannah's expertise and support, we are taking the fear out of money and empowering you to be a successful business. You can do this!

Throughout the process of making this course with her, we have learned so much. She has so many clear examples and literally translates all the confusing IRS language into phrases that ring with clarity. This course we created is a labor of love, and is a must for anyone who has ever been the least bit confused about how their art practice fits into the greater tax world.

A number of confidants have already taken the course and are saying things like:

Taxes can be intimidating and confusing. Tax professional Hannah Cole is just the opposite. In The Ultimate, Honest Guide to Understanding Artist Taxes, she delivers clear, concise, information with an encouraging and empowering style.
— Alix Sloan

Go ahead and sign up below to get notified when the course launches on February 7th, and so you can get an amazing discount and be ready for tax season!

 

 
 

© 2017 Kind Aesthetic, All Rights Reserved.

Self Employment Tax, for the new freelancer. (Part 1/3)

Welcome to the new "Tax & Money Stuff" column, a partnership with Hannah Cole. Hannah is a tax expert who specializes in working with creative businesses and artists. A long-time working artist, the financial challenges of freelancers and small creative businesses are both relevant and personal to her. She is the founder of Sunlight Tax. Read her post about saving for retirement here.


Guest post by Hannah Cole

Rikki and Carrie, Dining Room.   Carrie Will , 2008  From the series entitled,  I am redundant, half of a whole, a freak, identical and lucky.  Courtesy Novado Gallery, Jersey City

Rikki and Carrie, Dining Room. Carrie Will, 2008

From the series entitled, I am redundant, half of a whole, a freak, identical and lucky.
Courtesy Novado Gallery, Jersey City

Self Employment tax is two identical pieces, each 7.65%, totaling 15.3%

You’ve dreamed of quitting your job and striking out on your own. You’ve gathered some clients, or sold some artwork, and suddenly this year, you’re making some real money. But then you hit a speedbump. You file your taxes this year and discover that you owe money - a lot of money - that you didn’t expect to owe. Uh oh. This is a rude surprise that many freelancers encounter when starting out. The good news is, you’re making money. But the bad news is that anytime you make money, the government wants its share. And for a lot of freelancers, that share is a lot bigger than they realized.

Here’s why.

Self Employment Tax, Explained

Our tax system is “pay as you go.” Everyone is supposed to pay taxes all year long, as they earn income. When you work as an employee, your employer takes care of the logistics for you - they withhold 7.65% from your paycheck for Social Security and Medicare (also known as FICA). In other words, you are paying the Federal government 7.65% of your paycheck towards Social Security and Medicare, but you don’t have to think about it. In addition, your employer pays, out of their own pocket, another 7.65% towards Social Security and Medicare, on your behalf. This is called “payroll tax.” If you’ve ever wondered why so many businesses try to pay people as contractors (reported on a 1099) and not as employees (reported on a W2) - this is the reason. It automatically costs them 7.65% extra to treat you as an employee. (And it is fair and contributes to a healthy society, if I may say so).

Now what happens when you work for yourself? First, there is no payroll department taking care of this stuff for you. You have to figure it out yourself. You must pay the government the same 7.65% of your income toward Social Security and Medicare that you would have as an employee. However, since you are also the employer now, you also have to pay the second half of the Social Security/Medicare equation.

Terence Hannum , "Sapere Aude II"  / Magnetic Audio Cassette tape coating from an Immanuel Kant book on tape on panel / 11" x 14" diptych / 2014

Terence Hannum, "Sapere Aude II"  / Magnetic Audio Cassette tape coating from an Immanuel Kant book on tape on panel / 11" x 14" diptych / 2014


Two sides of the FICA equation

Except now, instead of calling it “payroll tax” you call it “self-employment tax.” You pay a full 15.3% of your income (that’s 7.65 + 7.65) towards Social Security and Medicare, because you are both an employee and an employer. Those are the broad strokes of self-employment tax. If you’re not a details person, you can stop here, and just remember that about 15% of your freelance income must be set aside for Social Security and Medicare. If you’re up for another detail, then read the twist in the footnote.*

When you’re self-employed, you’re going to pay this 15.3% on your net income, regardless of how much income that is. But it’s important to note that your income tax is over and above this amount. Your income tax is a percentage of your taxable income (that is, your net income after taking certain deductions), based on your tax bracket. So keep in mind that setting aside 15.3% of your self-employment income isn’t enough. You’ll need to put aside enough to cover both your self-employment tax and your income tax. Now that I’ve explained what self-employment tax is, I’ll be covering strategies for putting enough money aside for your taxes in an upcoming post.

So back to you and your new freelance income. If you aren’t expecting it, the first year’s tax bill can be brutal. In my tax practice, I see a lot of freelancers after their first year making a decent income from self-employment, who are blindsided by how much tax they owe. And generally, the reason for their surprise is that while they were expecting the income tax part, they didn’t account for the self-employment tax. This is where estimated quarterly taxes come in. They take the sting out of the April tax bill, and become obligatory by law once you have a large enough tax obligation. Stay tuned for those details in the next post.

Hannah is a tax expert who specializes in working with creative businesses and their owners. A long-time working artist, the financial challenges of freelancers and small creative businesses are both relevant and personal to her. She is the founder of Sunlight Tax. Follow Hannah on Twitter at @sunlight_tax, or sign up for her newsletter to get friendly, timely updates about money stuff for creative people.

 

 

*Here’s the twist: When you are self-employed, one half of your Social Security/Medicare tax (7.65%) is tax-deductible. So you actually pay one of your halves on 92.35% of your income (100% - 7.65% = 92.35%), and the other half on 100%. A little tricky, but it’s a deduction that works in your favor.

 

Disclaimer: This is meant as a guide, not professional advice. If you have questions about your own situation, talk to a tax professional.

© 2017 Kind Aesthetic, All Rights Reserved.