How to start a photography business
Taxing options For Photographers
Introduction | Taxes | Business Types | Hobby | Sole Proprietorship | What Is A Write-Off? | The Advantages and Disadvantages of a Sole Proprietorship | Partnership | LLC — Limited Liability Company | Corporation | Double Taxation | Limited Liability | Tax Forms | Sales Tax
“If I make money at photography, do I have to declare it on a tax form?” (Answer: Yes) "If I sell a photo, do I have to start a business?” (Answer: No) "Can I write off my camera?” (Answer: Possibly, If it is a necessary and ordinary expense)
Disclaimer: I am not a lawyer and this is not legal advice. Use at your own risk. The following is my opinion but it may be wrong, misleading or inaccurate — do not rely on anything written here. Laws vary by province and change over time. If you know of an error, please let me know. If you have a legal question, please consult a lawyer.
First of all, congratulations! you’re making money at photography, that’s impressive. Now that you are (to some degree) professional, you get the pleasure of considering one of the two things in life that you can’t avoid: taxes.
The one thing all governments are good at doing is funding themselves. So whenever you make some income, the taxman is very keen to know about it.
All income has to be reported, even that $10 from licensing images on a microstock site. But the amount of tax you pay depends upon how you’re operating your business. Presumably, you want to minimize the amount of tax you pay, so you can save money by choosing an optimum business type.
The main types of business (in the U.S.) are:
- Hobby: What your work is called when you don’t have an established business.
- Sole Proprietorship: A business owned by a single individual (or a husband and wife who file join income taxes) who receives all profits.
- Partnership: A business owned by two or more persons who are liable as co-owners of the business for profit.
- Limited Liability Company (LLC): A business owned by one of more people who have limited liability. (Not available everywhere.)
- Corporation: A business owned by an independent legal and tax entity which remains intact even If its Officers and Directors change.
Which is best for you? How you structure your business affects:
- How much tax you pay.
- How much expenses you can “write off.”
- How much paperwork you do.
- How much You’ll be exposed should you go bankrupt or get sued.
Simple approaches such as a sole proprietorship and partnership have minimal tax and paperwork involved, but your personal assets are at risk should things go bad. You can protect (or “limit”) your personal assets by forming a separate, “limited” company with a corporation. However, the trade-off is double taxation and more paperwork. (An interesting mix of all three is an LLC.)
For example, I started as a hobby, became a sole proprietor for several years, then incorporated the business as a corporation, to protect my house and family from liability. Most individual photographers operate as sole proprietors, as the taxes and paperwork are easier and there aren’t major assets in photography.
You don’t need to officially establish a business. In this case, in tax terms, you operate your photography as a “hobby.” This is how most people start. There’s no additional paperwork required — checks are written direct to you (payable to “Joe Bloggs”) and any income is declared on your personal income tax return, under the line “Other income.” (Consult a tax preparer or tax software for this.)
However, if you have more than a few payments — recurring revenue — then you need a business license. For this, you need to establish a sole proprietorship.
Most photography businesses are “sole proprietorships.” This is where one person (you, on your own) operates for profit. You can have a real business name, a business bank account, and employ people. It’s a great place to start — if you’re unsure which business type is for you, then this is the business type for you.
The laws to start a sole proprietorship depend upon where you live. Being in California, I had to comply with several state, county and city laws.
First, I had to file a “fictitious name.” This is the legal name of the business (anything other than your last name). It’s also known as a trade name or “DBA", for “doing business as.” My business name was “PhotoSecrets Publishing,” so I was “Andrew Hudson DBA PhotoSecrets Publishing.” (You can’t use “Inc.”, “Corp.”, “LLC", those are legal terms for other business types.)
I went to a county building, researched to make sure there was not already another business with that name, then filed some paperwork, paid a small fee, and had to advertise the name in a local paper for three weeks.
Once the name was official, I had to get a city business license (another small fee) and confirm that my business address (my rented condo) was zoned for that type of activity. (I also applied for a state Seller’s Permit/Resale Number, in order to sell books and collect sales tax.)
With the business name official, I could open a separate bank account for the business, and thereby cash checks made payable to “PhotoSecrets Publishing.” Now I was in business.
Come tax time, I used the business bank account to total up my income and expenses (not much and a lot, respectively). Then I filled in an attachment to my 1040 tax form called a Schedule C. (This is a key advantage over a corporation — I was taxed once then, whereas now that I’ve incorporated, I face double taxation).
I made a loss that first year, which was great, because I was able to write-off a new camera and computer and get a refund on my income taxes! (I had worked the first three months of the year in a “real” job with income tax automatically deducted.)
What Is A Write-Off?
A “write-off” is the main financial benefit of starting a business — it allows you to reduce the amount you pay in taxes. You can “write-off” the cost of any ordinary and necessary expenses, such as your camera equipment, travel, telephone, and other business costs. These expenses are deducted from your “gross” income to show a lower “net” income. With a lower “net” income comes lower tax payments.
For example, say you earn $1,000 from photography. As an individual, at an (imaginary) fixed tax-rate of 25%, you’d have to pay $250 in taxes. But with a business, you could deduct the cost of your $800 camera (if the expense was necessary to create the income) to show a net income of $200. ($1,000 — $800=$200.) Now you pay $50 (25% of $200) in taxes rather than $250 — a savings of $200. You can even make a loss and get a tax credit. For example, say your travel costs were $600. That gives you a net loss of $400 ($1,000 — $800 — $600=-$400). Now you get a tax credit of $100 (25% of $400). You can apply that credit against income tax from another job, or against income tax in the future, to reduce your tax bill by $100. (This is only an example — the cost of cameras and other long-lasting equipment may need to be “depreciated” over several years.)
You don’t need to make a profit to get a write-off. You can make a loss as long as your loss is in line with the losses of similiar businesses and you can demonstrate that you’re attempting to make a profit.
Only ordinary and necessary expenses are permitted — you can’t write off a new Mercedes or summer vacation. Consult the IRS and a local tax preparer for more information.
The Advantages Of A Sole Proprietorship
- Simple — This is the easiest business type to establish and file taxes for.
- Single Taxation — you avoid the double taxation of a corporation.
- Sole Ownership — You don’t have to report to or justify youself to anyone else.
The Disadvantages Of A Sole Proprietorship
- Unlimited Exposure — Your personal assets can be seized in a lawsuit and by business creditors.
- Hard To Borrow — A loan for the business is really just a personal loan.
- Sole Ownership — You can’t own the company with a friend or get funding from a partner, and if you die the business may disolve.
For the first one, you need a corporation; for the last one, you can have a partnership.
This is similar to a sole proprietorship but with more than one owner. You can get funding from someone else, work with a friend, and divide responsibilities based on your strengths. As with any mix of friendship and money, It’s worthwhile having a written agreement, in case things go sour.
There are two types of partnership: general and limited. With a general partnership, all partners are nominally equal and have their personal assets exposed. With a limited partnership, at least one partner (presumably you, the photographer) has their personal assets exposed but you can get funding from “silent” partners, whose exposure is limited only to the amount they invest in the business. This is good if you have a rich uncle or supporter — someone who is willing to give you money in return for ownership and profit participation, but (understandably) wants to protect their personal assets. Forms need to submitted to identify the exact role and liability of each partner.
Some states allow LLPs — limited liability partnerships — where all partners are protected, but this is more for law firms not photography ventures.
LLC — Limited Liability Company
- The taxation advantages of a sole-prorietorship (single taxation and personal tax rates);
- The funding and trust advantages of a partnership (multiple owners are permitted; if you die the business will continue to exist with the other owners); and
- The limited liability of a corporation (your personal assets are protected).
You can have a one-person LLC, so this is a good step up from a sole proprietorship.
A corporation is a separate business entity. You can own it outright, or with other shareholders, but the business stands alone. The business can borrow money (as a business loan not a personal loan) and, if the business gets sued or goes bankrupt, your personal assets are separate and protected (mostly — you can still get sued personally for illegal activity).
My business is a corporation (called, since I sell mostly my photo tour books, “Photo Tour Books, Inc.”). I’m the sole shareholder and I fill all the director and officer roles.
The main drawbacks of a corporation are the additional paperwork, costs, and taxation. I have to pay myself from the business, so I mail myself a check and pay all the taxes such as unemployment and medicare (actually I hire a service to do that, so there’s another cost). The business tax paperwork is more complicated than (and in addition to) the personal tax paperwork, so I pay a tax accountant. And then there’s the dreaded double taxation.
Since a corporation is a separate entity, the business itself is taxed in addition to your personal taxes. For example, when I sell some PhotoSecrets Books, the income goes first to the business — where it is taxed — then to me as a paycheck — where it is taxed again. The same income gets taxed twice!
This double taxation is quite frustrating and a significant reason not to have a corporation. However, due to different tax rates, it can be beneficial for revenues over a certain threshold and in other situations. A local tax attorney could help advise you.
The great attraction of a corporation for photographers, is the ability to protect your personal assets. Your liability is limited to the assets of the business and you can protect your house, personal car, savings, pension, spouse’s wealth, kids’ inheritance, and other personal wealth.
Every day in business, you risk being sued by someone or losing money and having creditors come after you. With a sole proprietorship and a partnership, you and your business are one and your personal assets are on the line. With a corporation and (in some configurations) an LLC, the business is an entity separate from you. There’s a “corporate veil” between your assets and the business.
However, there are two instances where you are still at risk. If you mix your personal and business activity, money and/or assets, a creditor can show that the corporation is not separate from you and can “pierce the veil” to reach your personal assets. If you do something beyond the scope of the business (such as something illegal), then you can be sued personally.
As a successful business owner, you’re going to learn all about delightful tax forms. Here’s a primer:
Basic U.S. Federal Tax Forms
- 1040: Form 1040 is the standard personal income tax form. If you’re just starting your photography hobby and have received one or two payments, then You’ll probably declare them on your annual 1040 as “Other Income.”
- Schedule C: If you’re getting multiple or recurring income, want to write-off some expenses, or operating as a sole proprietorship, You’ll need to file an addendum to your 1040 called a Schedule C. This is a tax form for your business, asking for income and expenses in order to calculate your net income or loss, which is carried over as a line item to the 1040.
- 1099: How does the tax man know that you’re operating a business? Because your income is reported by the company paying you. For any payments over $600, payees are required to report the transaction to the IRS on Form 1099-MISC. (For more, read Independent Contractors).
- W-9: To complete a Form 1099, any company paying you over $600 will need you to complete a Form W-9. Whenever I get a new client, they often ask me to sign a W-9 before I can get paid, so I keep a signed form ready to fax to any company that requests it. A W-9 simply asks for your name as declared on your income tax return and your Taxpayer Identification Number (TIN).
- TIN: (Taxpayer Identification Number). If you’re just starting out and operating as a hobby or sole proprietorship with no employees or other complications, then your TIN is your Social Security Number (SSN). An SSN has nine digits, in the form xxx-xx-xxxx.
- EIN: (Employer Identification Number). This is a separate Taxpayer Identification Number required for anything more complicated than a basic sole proprietorship. You’ll need an EIN if you have employees, are a resident alien, or have a partnership, LLC, or corporation. An EID has nine digits, in the form xx-xxxxxxx.
- SS-4: To apply for an EIN, use Form SS-4.
There may be state, city and other forms. For more information, consult the IRS or a local tax accountant/specialist.
In the U.S., there is no federal sales tax but some states and cities levy it. California, for example, has a sales tax, so — since I operate a business there — I have to collect and pay sales tax on any tangible items I sell within the state. (Books delivered out of state, books sold to a wholesaler, and stock photos delivered electronically are not taxed). I had to get a s eller’s permit and, each year, I fill in a Sales and Use Tax Return with the state Board of Equalization.
Note that sales tax is a tax on the seller, not the buyer, even though (in the U.S., not in Europe) the amount is usually added to the bill. Thus, the onus is on you know about and pay the tax.
Sales tax varies by region — country, state, and even city — so consult local help.