I bet when you were imagining your journey as a freelance photographer, filing taxes never crossed your mind. At that time you were thinking of the beautiful moments you would capture. Stunning pictures that would make anybody looking at them linger for a while just to appreciate the artistry.
But, here you are wondering if you might find yourself on the wrong side of the Internal Revenue Service (IRS). Is it time you started paying your income taxes? What about your self-employment taxes?
Don’t worry. In this post, we will cover all the basics that a freelance photographer needs to learn to file their own taxes. Most importantly, we will discuss how you can take advantage of tax deductions to pay less tax.
It's not a walk in the park but with the right preparation and with the right tools, tax filing day will just be another normal day at work.
Note: The best way to stay on top of your freelance photographer taxes and maximize your tax savings, is with an app like Bonsai Tax. Our software will help you calculate your self-employment tax liability, send you filing reminders, and track all your business expenses for you (we'll scan your bank/credit card receipts to organize all your deductions automatically). Users typically save $5,600 from their tax bill with our services. Try a 14-day free trial today.
Does your tax bill start accumulating immediately when you earn your first dollar from photography?
No, regulations state that if you are the sole proprietor of your business and you are below the age of 65, you become obligated to pay taxes if you earn a minimum of $12,000 per year.
Additionally, If your annual income, after deducting tax credits and business-related costs, is $400 or more, the government expects you to pay self-employment tax to the tune of 15.3%. This exclusively to caters to your Medicare and Social Security taxes.
Note, if you haven’t legitimized your photography business, you will still be liable to pay tax for its income but you can’t claim deductions from its expenses. This is because the IRS no longer allows deduction of business expenses against hobby income.
If you have been doing photography as a hobby, consider legitimizing it either by getting a sole proprietorship license or registering it as a limited liability company (LLC).
Business tax is calculated annually. The option to make quarterly payments exists to avoid a situation where the taxpayer can’t afford to pay the full annual debt.
Let’s say you are estimating your tax bill for this year to be $1600. It makes more economic sense to pay four installments of $400 across the year than to make one large payment when tax season rolls in, right?
Still, as per the IRS, any self-employed person with a tax liability of $1000 or more after subtracting federal tax withholdings, is required to complete or file estimated tax payments each quarter.
Federal tax withholding is the amount withheld from your paycheck by your employer to cater to federal taxes. You are self-employed but one of your clients may be automatically withholding a percentage of your pay as withheld tax.
In this case, make sure to deduct the amount from your estimated tax to avoid overpaying.
If the taxes withheld cover more than 90% of your estimated tax debt for the current year or 100% of your tax debt for the previous year, you don't need to make quarterly payments.
To estimate your quarterly tax payment, use Form 1040-ES. It’s one of the six IRS forms that every freelance photographer needs to be familiar with. I will be telling you what each of these forms does in a short while.
Form 1040-ES contains everything you need to know to determine the estimated taxes for each quarter. It prompts you to enter your financials such as your expected gross income, list of tax-deductible expenses, and your federal tax withholding.
It will then guide you through the math process of coming up with the quarterly estimate by telling you when to subtract, multiply, or divide.
The form also contains additional information such as the date when each payment is due and situations that may lead to penalties.
Don’t worry about overestimating or underestimating your due tax in one quarter. You can always correct it when you do your estimates in the next quarter. And if at the end of the last quarter it turns out you have overpaid, you can request a refund or have the overpayment apply to future tax payments.
As a photographer, there are multiple expenses that you can deduct from your photography income. This will consequently reduce your taxable income translating to reduced taxes. Here are some of them.
All equipment that you'll use for more than a year is considered capital expenses. Your camera is a capital expense IRS allows you to annually deduct a fraction of the cost of these expenses from your gross income over several years. This process is called depreciation.
There are three methods used to depreciate your equipment.
This is the simplest depreciation method and forms the foundation for all the others. First, you need to determine your equipment’s salvage value. That’s an estimate of how much the equipment will be worth after it has served its purpose.
Next, subtract the salvage value from the equipment’s original cost. Finally, divide that amount by the number of years you expect to use the equipment.
Let’s say you bought your camera for $3500 and you plan to use it for 5 years before upgrading. Assuming that after these 5 years the camera will be worth $1000, then that’s its salvage value. To calculate its depreciation, subtract $1000 from $3500 and divide the amount by 5. You get $500 meaning you can write off $500 per year for five years for the camera.
This method of depreciation is most suited for properties that have a higher rate of depreciation in their earlier years than later years. It allows you to claim a larger deduction at the beginning and smaller deductions over time.
However, the total depreciation cost that is tax-deductible does not change. Using the above example, the total amount to be deducted will still be $2500.
The only difference is that instead of writing off $500 for 5 years, you can write off $1000 in the first year and then spread the remaining $1500 across the remaining 4 years.
This last method involves more calculations but if you feel that it suits you better than the other two then go for it. There is no easy way to explain it so I’ll just use an example.
The first step is to create fractions based on how much useful life your equipment has remaining. Using our camera example, in the first year, you have five years of life remaining, in the second year, you have 4 years of life remaining. Year 3 has three years of life remaining and the process continues until you have no life remaining.
Add up all these years. 5+4+3+2+1 = 15. The fraction for year 1 will be 5/15 and year 2 will be 4/15. The last year will be 1/15. You get the drift, yes? To get how much you can write off for each year, multiply the year’s fraction with the product's salvage value.
Alternatively, you can deduct the whole depreciation cost of your equipment at once to get a huge tax break in the first year but small tax breaks in the next years.
Every piece of equipment that you bought to facilitate your photography business can be written off. This includes cameras, tripods, lenses, lights, computers, and even props.
How much do you pay for your studio? This amount can be tax-deductible too. The same is true for any payments you may make to cater to the storage of your photography equipment.
If you have to travel for a photography gig, then that is considered business travel and you can deduct every expense you incur in the process. This includes air tickets, meals, accommodation, car rentals, and car insurance. In 2021, the IRS also accepts deductions of about 56 cents for every business mile you travel using your car.
To grow as a photographer, you may have to take a few classes. Every cost you incur to gain new knowledge about your business is tax-deductible. Training expenses also include magazines and books that you buy to learn about photography.
Now, the truth is we can’t exhaust all the expenses that are tax-deductible when filing freelance photography taxes. There are a lot more like business meals, telephone, insurance costs, legal expenses, and marketing expenses that we are yet to cover. Other expenses will be unique to your business.
The important thing to know is that the IRS recognizes deductible expenses as any expense that you incur and is necessary to run your business.
Note, the IRS requires that you attach receipts for taxes as evidence that your write-offs were legitimate business expenses. The receipts also need to be categorized to determine what type of expense it was. This means you need to have a very accurate tracking system to account for all the expenses.
This brings us to the final part of this post.
Every tax expert will tell you that practicing good bookkeeping is the best thing you can do to prepare yourself for tax time. You need to record every financial transaction that involves your business.
Admittedly, it’s not an easy task. The good news is that you no longer have to do it manually. There are multiple solutions you can use to track your business income and expenses and Bonsai Tax is one of them.
Our software integrates with your bank account and credit card and will automatically import your freelance income, expenses, then proceed to classify them for you.
Then to facilitate efficient tracking of cash transactions, the software comes with a receipt scanner. The scanner is equipped with optical character recognition technology that reads the content on the scanned receipt and inputs the data on your expense report.
But, here is the best part. The tool identifies expenses that are tax-deductible and automatically write them off. It will then use all the information provided to estimate your quarterly taxes so that you never get caught unprepared.
If you want to opt to manually track your expenses, try our free self-employed tax deductions worksheet.
Apart from efficient expense tracking, the software also comes with other modules that will be especially useful to you as a freelance photographer.
To start with, it comes with customizable invoice templates that are sent automatically to your client after the completion of a project.
It also features contract templates that will enable you to set the terms of your relationship with clients.
You can try our expense tracker for 14 days at no cost.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?