Time for our last week of my Finance for Creatives series! This and the past two posts were intended to provide the foundation for a sustainable career aimed at helping those in creative pursuits. While there’s so much more to say, this series should help get you started.
If you missed my last two newsletters, visit my page here. I’m writing this series ahead of a seminar I’ll be leading on July 10th titled Finance Basics for Creatives, which you can register for here.
This discussion will focus on our final topic, one that has stricken fear into my heart and the heart of so many others…taxes.
I’ll begin with a discussion on taxes. Guiding you through how to prepare to pay them quarterly and annually, you’ll learn the basics you need to prepare. Then it’s on to the good stuff, where I’ll give you inside scoop on how I pay as little in taxes as possible (legally)!
Taxes are one of the most critical considerations for an artist or creatively-employed person simply because so many of us are freelance workers. I’ll discuss taxes as it pertains to salaried workers later, but it is a far more delicate matter for the self-employed. In the United States, at least, the government is not friendly to freelancers. We are taxed up the butt.
The rule of thumb to remember is this: if you make income in any given fiscal quarter, be sure to pay taxes on it in that quarter. You only need to pay taxes if you made income that quarter! Otherwise, no worries.
There’s a reason freelances are told to pay taxes quarterly. For one, they have to. It’s literally required. Also, it is easier to manage them this way. Keeping tabs on what you owe the government on a more frequent basis helps avoid a surprise bill—one that may be difficult to swallow—come tax time.
How much do you owe? Well, if you have an accountant, let them run the numbers based on your gross income per quarter. Otherwise, estimate! And don’t estimate low, set a conservative figure that will help you avoid underpaying and receiving penalties. Because I don’t know where you live, I’d recommend 40% as a fair estimate.
The reason I mention where you live is that you must file state and federal taxes. I’m going to give a pro-tip about this later in the post, but certain state income taxes are higher than others. Like, a lot higher. So 40% should help you cover your bases.
I know, it’s SO much! Yet you have to keep in mind that the reason it seems lower for salaried individuals is that companies will withhold those taxes from their paycheck.
Now, once you’ve withheld that 40%, break it up by federal and state taxes. Determine what your state’s rate is (using Google) and multiply that with what you made in order to get an estimate. Same for federal. Now, go into the IRS’ website as well as the tax website for your state to submit those payments quarterly.
Oh, and for reference, here are the quarters…
Q1: Due on April 15th
Q2: Due on June 15th
Q3: Due on September 15th
Q4: Due on January 15th of the following year
I don’t recommend paying a service to do this, it is easy enough to do yourself. My tip is to use a certified public account the first time, study what they do (even take notes!) and then you can pay these quarterly taxes on your own. For federal taxes, Google 10-40 ES to get the form :)
Now that you’re set on quarterly taxes, let’s talk the expenses and annual taxes that both freelancers and salaried employees must consider!
Annual Taxes and Deducting Expenses
Now, I’m sure you’ve been reading and wondering, “Okay, but what about my expenses? Surely I can deduct a bunch of things and save lots of money on taxes?”
YES YOU CAN.
But, let’s first lay some groundwork with the annual filing you’ll need to do. This is where you note everything you made across the four quarters (‘The Four Quarters’ sounds like the name of a bar, by the way).
Annual taxes must be paid by both freelancers and salaried creatives (duh) and the process is very similar.
So, if you’re purely a salaried worker at the moment, just have your W-2 handy, the form your employer is required to give you. I’d recommend using Turbotax for filing both state and federal taxes there (yup, you need to do both). I despise that Turbotax and the other tax filers profit off what should be a free public service—yes, our tax system is corrupt, go figure—but they are easy to use and make the process manageable. Not to mention, they store your returns for later use, which is helpful (say, if you’re buying a house and need a mortgage).
If you’re a freelancer, I’d recommend asking for the help of an accountant. Why? Well, a good accountant will help identify expenses you can deduct, help factor in what you’ve paid over the past four quarters, and give you the background you need should you want to do everything yourself in the future. I personally use an accountant, especially because my income comes from both freelance and a salary (it gets messy).
I am not here to tell you how to track your expenses. My method is to pay all my extensible items (to the degree that I can) on my credit card. Then, each year, I go in and look at the statements, which should have a reliable record of those expenses. Others I know use Excel or other bookkeeping software. Whatever floats your boat, as far as I’m concerned.
What I am here to say is to track those darn deductions! If you’re salaried, it is hard to get your deductions to a level beyond the standard deduction. If filing with kids, however, I know there are additional ones you can take, and this 25-year-old unmarried fellow is not the person to consult.
In terms of deductions, I personally have found it helpful to see examples in the past, so I’ll use them myself! As a writer, here are a few things I deduct if purchased that year:
Anything you use to write: laptop, tablet, even a cell phone!
Writing software: Microsoft Office Suite, Scrivener, etc
Books! After all, I have to study up and research to write, don’t I?
A part of my mortgage/rent expenses if I write from home, and any office space should you use that.
My accountant’s fee (a good reason to use one if you’re considering it)
Going out to eat with writing friends
Trips abroad, writing retreats, and anything you can tie to your writing
An extra personal example is that I expense my yearly trip to Lebanon, where I set parts of my book, as that is ‘research’
Miscellaneous things tied to my writing
Arabic lessons to stay sharp for my Arab characters
Gas mileage if traveling to do writing events
You get the point, right? I can expense A BUNCH of things. It’s the silver lining to being a freelancer.
Now, onto the final part of this discussion, the spicy stuff…
How I Pay Less in Taxes
Them: “George, how dare you pay less in taxes?”
Me: “How dare you overpay?”
Now, if you’re trying to save as much during this process as me, there are three tips I have for you. These are tricks the pros use and are completely legal. I’d never advocate breaking the law, however, what I’m going to propose is going to keep more money in your bank account.
Donate: there is a tax deduction for donating money to qualified charitable donations. Most organizations fall under this category so, if you donate already or are planning on it, definitely consider paying some of your income forward. I donate to a few and nothing feels better!
Retirement Accounts: I mentioned it in my last post, do not miss out on this opportunity!
This is my #1 recommendation and what I take the most advantage of. In fact, most of the money from my book deal (besides all the money I squirreled away for taxes) went into a retirement account.
If you read my last post, you’ll know all about non-taxable accounts. The ones I recommend are 401ks, IRAs, and HSAs. For freelancers, I recommend a Roth IRA and a self-employed 401k, which let you throw in around $6k and $20k per year, respectively, of non-taxable funds. Funds you do NOT need to pay taxes on.
Find a low-tax or tax-free state: this is the only trick I don’t yet currently use, though I may in the future. In the United States, there are some states that charge very high-income taxes (such as California) and some that charge none at all (like Tennessee). And there’s a whole spectrum of states in between.
My recommendation: check out either South Dakota, Florida, or Texas if you can live in one of these states. They all do not tax income, effectively saving you around 5% of what you earn each year. Maybe it’s not worth doing so for 5%, but say you get commissioned for a project that pays $100,000…well, $5,000 is a decent sum of money!
There you have it, friends! We’ve reached the end of my three-part series and I’ve probably answered some of your questions, but will likely have left you with more questions than when you started (and that is OKAY).
Thanks for sticking around for it all, it means the world!