I haven’t decided yet if this is going to be a monthly or more of an “as I feel inspired” series, but I do know April is a perfect time for me to write about a topic I’ve wanted to explore more with all of you: TAXES.
Ooohhhh, such a dreaded word, right? Well, here’s what I know about taxes:
- There is—and always will be—a lot I DO NOT KNOW about taxes.
- There is a lot I wish I WOULD HAVE KNOWN about taxes before starting my business.
Before I jump in, let me get honest with you for a minute: In December of last year, the state sent a letter notifying me I was (cue the scary music) going to be audited. I can give you a few ideas of how I felt in that moment but “punched in the gut” and “I’m going to throw up” are pretty accurate. Me? My little business? Audited? WHAT DID I DO WRONG?
I stayed up late for two nights, stressing out over every receipt, making myself sick in fear of the “big bad government”. Finally, after a crying jag on my husband’s supportive shoulder, I turned to prayer, letting go of the worry and realizing whatever was going to happen was going to happen. I just had to stay strong, put my head down and work my way through it.
After coordinating plans with my accountant, I soon got a follow-up letter from the auditor. It turned out, because my business had only been registered with the state as an LLC (limited liability company) for a year, they were not going to pursue the audit at this time. Are you kidding? Talk about THE BEST CHRISTMAS PRESENT EVER!
The audit scare forced me to take a REALLY hard look at the way I was handling my books and to clarify a few things with my accountant I had—unknowingly—been doing wrong. I swore if I made it through to tell about it, I’d do so shamelessly, willing to share what I learned. So here goes:
• Hire an accountant you can trust: This seems like such a no-brainer but I know of many photographers shooting on a small scale who have yet to really talk about their photography as A BUSINESS with an accountant. If you are serious about taking people’s portraits or shooting people’s weddings, you need to sit down with someone to review the financial considerations of what that entails (like considering becoming an LLC, learning how to file with the state to collect state sales tax, etc.)
• Make sure you properly understand your state’s tax laws and what items should be taxed by your business: Reviewing my books, here is where I found myself in need of reconciling a mistake. While I had been collecting sales tax for print and album orders, I had not for DVD orders with digital files. In Indiana, you can give someone digital files over the Internet and not have to pay state sales tax. Give it to them on a DVD and you have to pay state sales tax. (Yeah, I know, it doesn’t make sense). The problem is, EVERY state is different with these “digital file” rules, so it’s CRUCIAL to understand what’s taxed (and how) where you live. It wasn’t fun to pay those back state sales taxes, but, at the same time, it was a valuable lesson (and now my conscious is free and clear over such a naive error).
• If you do get audited, it’s not the end of the world: My accountant shared with me I wasn’t the first (or last) client of hers to get audited (though, I was the first to be un-audited :) ). I admitted to her I felt like SUCH a failure for my error with the state sales taxes and I’ll never forget what she told me: “I have clients who’ve been unknowingly making mistakes for 20 years. It can happen to anyone. Don’t beat yourself up over this.” Permission to no longer feel like a failure? YES PLEASE.
• Big changes in your income from one year to the next? Expect to owe more—PLAN on it: Let’s say you made $10,000 from your small business in 2010. In 2011, you likely would have paid federal quarterly taxes based on that 2010 income level. But if you found yourself making MORE money than that in 2011 (say, $25,000), just know you’re going to owe quite a bit more than what you’d already been paying for the year in your quarterly taxes. Does that make sense? This is something I unsuspectingly had NO clue about and so it was a jolt to learn how much more I owed this month in both federal and state taxes for 2011. (Those numbers above are purely hypothetical, by the way, but I hope I’m making the point clear). Let your accountant know about big shifts in your income and be prepared for those types of swings by setting aside the proper funds to make sure you can pay off the extra taxes you owe.
• Invoice everything: This is an area where it’s easy to get lazy about or to play dumb (wait, what? I have to invoice everything?) but seriously, DO IT. It’s financially necessary but also will make your life easier if you are ever audited.
• Set up schedules on your calendars (with alerts) to remind yourself to pay your sales and federal tax on time: Twice in 2011, I paid state sales taxes late (for no other reason that I just forgot by a few days, which is easy to do when filing electronically). To this day, I’ll wonder if that was the “red flag” that sent that audit letter my way. Now I know the importance of filing everything on time.
• We are creatives, not number punchers: In the depths of my “Woe is me”-ing last December, I pointed out to my husband that I should have been more on top of things, should have known better. But Nick (just like my accountant) reminded me of two important things: 1) I haven’t been in business very long—I still had (and have) a lot to learn and 2) I was born to excel at creative pursuits like writing and photography NOT being an accountant (said to a girl who uses a calculator to balance her checkbook). This was an area of my business where I definitely couldn’t “do it all myself” and while a part of me knew that already, going through this experience cemented that understanding.
OK, that’s it! I know it’s a lot to say—and remember, I’m no expert here (find your OWN accountant for that)— but this is an area of the industry I’ve LONG felt people have stayed silent about (and as a result, there’s a grey area to it all that rivals the size of the Grand Canyon). If any of you have any questions I might be able to answer (or your own tax lessons to share), please do so in the comment section!