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I have recently been the lucky recipient of an unprecedented amount of small, but not insubstantial, payments. Some are for arts writing and editing, others are one-time grants, art sales, and various art-world related odd jobs. All have been issued through W-9s and will show up come tax time as 1099-MISC income. None have been taxed. I do have a regular 9-5 job that gives me a more stable income and provides for my room and board. This new, supplemental income will mostly go toward studio rent and art supplies. I understand I should set aside a portion of these funds for the state and feds, but where do I start?
First, congratulations! Nice job on your grants and sales, and good hustle on the art-related income. Second, I can't believe you came to me for advice that involves numbers. All I can recall about Algebra 1 was that my teacher had a glass eye, and there is honestly a question in my mind as to whether I ever once attended Algebra 2. My strongest memory related to arithmetic doesn't even have to do with numbers: one summer in college I took a remedial math class and the guy who sat next to me wore a Stone Temple Pilots shirt every day.
Now that I'm wiser and more mature, I shove art-related receipts into an envelope and then hand the whole thing off to an accountant while hyperventilating.
If that's not enough to scare you away, read on, because I've unearthed information that will help us both.* To start, I contacted a friend who is an accountant in a museum, and she backed me up about hiring an accountant: "The best advice I can give you is to seek the counsel of a professional tax accountant who specializes in artists and freelancers. He/she will be able to really analyze your situation and give you advice that is current to state and federal tax law." It may seem like a cop-out to point you to a professional, but the U.S. tax code gets changed every year; so depending on the specifics of your situation, it may be better to hire an expert who can captain your little financial tugboat through the choppy waters of deductions, exemptions, withholdings, etc.
My friend sends you some more advice: "The quick and dirty is this: reduce your exemptions at your day job and save your receipts on all expenses related to your practice. Review the W-4 you submitted to your employer and resubmit it with fewer exemptions. Many people I know who freelance and have day jobs take zero exemptions on their W-4. A Certified Public Accountant can help you determine the best exemption rate for your situation so that you neither owe nor get a refund, which is the best possible outcome. You want that money in your pocket, as you earn it."
Llyn Foulkes, Dali and Me, 2006
She also pointed me to the book Legal Guide for the Visual Artist, by Tad Crawford. Chapter 20 deals with taxes on income and expenses, and though I glazed over somewhat in a tax-vernacular-inspired stupor, I actually learned a few things we can both bear in mind.
First, "[t]he artist realizes ordinary income from all income-producing activities of the artist's profession" [italics mine]. Ordinary income (what you're earning with your many jobs) is taxed at a higher rate than capital gains income (when you sell stocks or real estate), up to 35%. This tidbit is important for two reasons: one, you can estimate your own tax and set that money aside so that you don't get caught short when April 15, 2014 rolls around (since you file W9s and claim all your income as a good citizen should, the IRS will tax you on all of it). Two, if you lump all your art-related income together, you're less likely to claim a loss after you subtract your deductions (see below), which means you're also less likely to have to prove to the IRS that what you do is a profession and not a hobby.**
Bear in mind that grants can be tax-tricky but can generally only be excluded from your net income if you're enrolled in a school ("degree candidates") and using it for tuition and so on. Prizes and awards are also included in taxable income, so again, expect to pay around 35% of their value to the government. You might end up paying a lower percentage, but it's worth it to assume the worst and put the money aside.
You probably already know that you can offset your taxable income by claiming deductions: for example, the art supplies and materials you use; the rent and expenses on your workspace if it's outside your home; some professional equipment; and "meals, lodging, and transportation…incurred in pursuit of professional activities." Again, this is where it might pay to hire a professional who specifically helps artists. My first accountant -- a very conservative man with a deep suspicion of the visual arts -- never let me deduct anything and seemed to live in terror that I would get audited. My new accountant makes sure my deductions are fair and appears to believe that I am in legitimate pursuit of a profit, even when my art revenue falls short of my art expenses. Much better!
Llyn Foulkes, Deliverance, 2004-2007
The book has a sample 1040 Schedule C (which you can also get here). Look it over. If it makes you frown so hard that your eyebrows fuse together, that might be a sign that you don't have what it takes to tackle this kind of thing on your own. Conversely, you might think, is this all? and feel confident that you're able to take it on. Perusing the form as well as the materials I have mentioned above will help you decide if your financial life is truly simple enough for you to handle a 1040 solo, or if it's more complicated and could use the help of a dedicated professional. Whichever you choose, good luck!
*I'm not an accountant. If I had a lawyer, I bet she would make me write some kind of disclaimer here about how the counsel I provide is for informational purposes only.You should consult a tax professional, and you shouldn't sue me if you get audited or whatever.
**It's complicated, but the gist is: if you're a professional you can take deductions; if you're a hobbyist, you cannot. See Legal Guide for the Visual Artist chapter 22, "Taxes: The Hobby Loss Challenge" for more information on the difference between the two, and the nine factors that determine "profit motive."