Financials 101: Part 1 of 3

Taxes

If you so much as breathe air in the United States, you pay taxes. Whether that's sales tax, property tax, income tax. Everything is fucking taxed. So, how do you pay taxes as a freelance artist, independent contractor, or small business?

Let's set an example to get started. Say I'm a freelance artist, 100% of my income comes from making & selling art (in whatever capacity). A few contract jobs here, artist markets there, and let's also say I sell products on a website like Big Cartel or Squarespace.

You don't need a contractor or business license if you're just starting small. You only need to file your taxes with your social security number. You report your income on Schedule C (Form 1040) and you must file a Schedule SE if your net earnings from self-employment are $400 or more. Not a lot, I know.

If you do work for a company as an independent contractor and that income is $600 or more, that business will send you a 1099-NEC. That's a pretty straightforward document, it's much like a W2. A business is telling the IRS, "Hey, we paid these people." It's your responsibility to set aside some of that money to pay the IRS because you're not an employer of that business so they are not doing any withholdings for you.

Before we can even start filing our taxes, we have to figure out how much of the money you earn will have to be set aside for tax payments. When you have a "real" job, meaning your employer handles all this paperwork, they deduct from your paycheck federal income tax, social security tax, and state and sometimes city taxes depending on where you live.

Let's say in your first year you make $18,000 (gross income)* from art-related work. We'll break that down to $1,500 monthly paycheck to yourself.

*We're going to also assume in this example you're filing as Single and have another job working for an employer and you're in a solid tax bracket. Even if you have two jobs and one of those is an independent, your total annual income from all your jobs determines your tax bracket. There are seven federal tax brackets for the 2021 tax year: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Your bracket depends on your taxable income and filing status.

The total Federal Taxable income you would have to apply to that 18K is 27.3%, and here's why:

15.3% toward social security & medicare, 12% toward federal tax. Let's say you live in Cincinnati, Ohio, where the state tax is 2.765%, and the city tax is 1.8% (You're going to have to look up where you live to calculate your state and/or city tax, usually you can find that info on a state government website).

In total, that all adds up to about 32%. So, 32% of your gross annual income, $18,000, is deducted. That is what you pay the IRS quarterly.

"Why quarterly? When I was a barista, I only paid my taxes once a year!"

Because if you earn more than $1,000 monthly as an independent, you make quarterly payments to the IRS to avoid an additional late penalty tax (which isn't the end of the world). The joys of being your own boss! This is you taking the standard deduction on your own. Look at you go!

Quarterly payments to the IRS for 2022 are: April 15, June 15, Sept 15, Jan 15

"But the IRS is scary! I don't know what to do!"

Here's what you do. Let's say you budget & hustle really well. Some months you earn more than $1,500, while others earn less. No matter how much you earn, to be safe, set up a monthly direct deposit from a checking account (or wherever you keep your income) to move into a savings account. The amount you should deposit monthly, let's pad our budget and round it up to 35% monthly.

Here's a breakdown of how we got here:

Total Annual Income: $18,000 x 27.3% (federal) = $4,914 (annual) / 12 = $409.50/monthly set aside

$18,000 x 2.765% state tax = $497.70 (annual) / 12 = $41.50/mo. set aside

$17.661.72 x 1.8% city tax = $324 (annual) / 12 = $27/mo set aside

That adds up to $478 you should set aside from your monthly income into your savings account where you will responsibly keep your quarterly tax payments. But to pad your budget and set aside extra in case you totally fuck up, round it up to 35% so you should really set aside $525. If you overpay the IRS, they will give you what you did not owe back to you.

"How do I pay the IRS???"

It's sort of the easiest step, once you set up your online account with the IRS, which requires proof of identity through documentation (i.e., driver's license, birth certificate, social security card, passport).

Then you can use Free File, or you can go old school and just mail them your payments, but it's the year 2022 of our lord, and everything is on the internet.

E-Commerce & Taxes

Now, if more than $600 of that income is coming from your online store, you will be sent a tax form from a site like Venmo, PayPal, Big Cartel, Squarespace, or Shopify. To access these forms, you log into your account, and somewhere in the account settings, you should easily find a tab that takes you to documents and tax documents according to year. While they calculate sales tax on your purchases, sales tax is something you also have to file. This is where we're creating a difference between running a business vs. being an independent contractor.

Because I want to avoid more headaches, I avoid this world altogether. But, websites like Shopify have very informative articles that can help you. Usually, website platforms like these automatically calculate sales tax for you, so that's easy. Other platforms like NetSuite even provide a Comprehensive List of E-Commerce Sales Tax Laws by State.

I would consult these articles to help you if you rely heavily on e-commerce to make your earnings. Since I've only worked as an independent, without e-commerce, I won't give you advice on this subject, but we will talk about how factoring tax payments into your budget will make paying the IRS easier.

Something else to consider to help you get a break on your tax payments is your expense write-offs. These are "necessary" expenses to help you do business, though they don't have to be indispensable to be considered necessary in the eyes of the IRS. Click the linked article for a deeper dive into expenses and business write-offs.

So, that is our introduction to taxes. Hopefully, that's a good foundation to start your tax journey as an independent artist. Do your research for where you live and take this information with a grain of salt. When in doubt, you can hire an accountant (if you have the money, but that's where budgeting can come into play! Stay tuned for part 2: Budgeting.

Staying Ahead

The best way to reduce your tax anxiety is to stay ahead of the game. How do we do this? Keep a fucking spreadsheet or a notebook ledger (but seriously, use Google Sheets or something that will do the math for you). Some templates are free and easy to set up so that can be a good starting point.

Start a new tab or sheet annually to track your income amounts and sources. If you have reliable clients you've maintained for years, this makes recordkeeping even easier. If you know that breakdown of what percentage you owe to the Fed, Social Security/Medicare, the State, and sometimes the City (if it's a big city with city income tax), you can easily start to apply those percentages to your income and predict how much you'll owe at the end of the year, and therefore, what you'll pay each quarter to meet that year-end tax payment.

You got this, alright? Don't let the tax man see you cry no more.