• Introduction to Accounting Principles
• Managing Finances and Financial Planning
• Building an Operating Budget
• Introduction to Taxes

2. Managing Finances and Financial Planning

Whether you're a sole proprietor or a C corp, you have to have your finances in order. Being organized about you money and planning for the future are one of the most solid foundations you can lay for your creative practice.

QUICK DISCLAIMER: I'M NOT AN ACCOUNTANT.

Managing Finances

From a high-level, we're going to cover the following:

• Banking
• Spending
• Receiving
• Tracking

— Banking

• If your creative practice is going to be a significant source of income, separate it from your personal finances and sign up for a business banking account.
• Remember, it’s best to keep personal and business assets separate.
• You can sign up for a business bank account through most banks — even as a Sole Proprietor.

— Spending

• CASH — Keep track of cash. Separate business cash from personal cash. Deposit cash ASAP.
• CHECKS — Use your business bank account checks, not personal checks. This is especially important if more than one person needs access to the back account.
• CHARGING — Sign up for business-specific credit cards and debit cards. Do not use you personal cards if possible. This is especially important if you have multiple people using the same credit card.

— Receiving

• GETTING PAID — You need to document the whole payment process:
  • Have a written agreement in place
  • Send an invoice to request payment
  • When you receive the payment, send a receipt
  • Check your bank records to make sure the check/payment clears.
• Always deposit money as soon as possible.

— Tracking

• RECORDING — Decide if you will use Accrual basis or Cash method for accounting.

  • Accrual Basis — Transaction recorded when the money is earned, but not yet received.
  • Cash Basis — Transaction recorded when money is received.
  • You can’t do both. You have to choose one.
  • Most people choose accrual.

• SAVE THE EVIDENCE — You need to save contracts, receipts, invoices, bank statements… anything that is evidence of money in and money out.

• USE A SYSTEM — You need to have a clear, organized system in place.

  • At the bare minimum, use a spreadsheet.
  • It’s worth it to use financial management software like Quickbooks.
  • It’s best to use something like Quickbooks + working with an Accountant.

Financial Planning

Now that you have the money, what do you do with it?

In terms of simplicity and accuracy to creative practices, I really enjoy this article from the Creative Independent:

An Artist's Guide to Financial Planning

From the article, we're going to cover two items: Budgeting and Investing.

— Budgeting

• Budgeting is about short term financial security
• From the article: The 50 / 30 / 20 Budget

A 50/30/20 budget is based on three simple categories:

• Obligations: how much you have to spend (50% of your income)
• Discretionary: any time you pay for a thing out in the world (30% of your income)
• Savings: the money that you don’t spend each month, which is building up your financial security (20% of your income)

— Investing

In other words, getting your money to make money.

• Investing is about long-term financial security (i.e. retirement)
• Investing takes advantage of the positive aspect of generating interest on a principal.
• Compounding interest isn’t just about debt. You can utilize it to invest and make much more money.
• Investing is pretty easy to do these days, but should always be done with a healthy dose of caution and advice.

For example:

• You decide to save $500 per year.
  • If you invest in a retirement account— In 30 years, you will have $54k (7% interest)
  • If you don’t invest, but just save — In 30 years, you will have just $15k

3. Taxes

Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.

— Benjamin Franklin, in a letter to Jean-Baptiste Leroy, 1789

Y'all, we ain't dead yet. So we gotta pay taxes.

From a high-level, we’re going to cover the following:

• Tax Levels
• Tax Rates
• Employee vs. Self-Employed
• Deductions
• Filing

Tax levels

Three levels of taxes

• Federal
• State
• Local — Including County, City, Township, etc.

Tax Rates

Corporations (and Non-Profits)

• Corporations are considered “people” — i.e. they have to file their own taxes independent of the individuals who run them.
• In the interest of time and sanity, we’re not going to cover corporate taxes.

Individuals

• Every individual in this country that earns money must pay income tax.
• There are other specific taxes, but we’re going to focus on income tax as it’s the most relevant.
• For tax rates, let’s visit the [IRS](https://www.irs.com/articles/2018-federal-taxrates- personal-exemptions-and-standard-deductions)

This video from Vox best explains how these tax rates work:

Employee vs. Self-Employed

Employees

• If you’re an employee, the income you receive is a Salary or Wage.

Self-Employed

• If you are Self-Employed, your income is all considered Business Income.

— Employees

• Relatively straightforward.
• You receive a wage or salary from an employer.
• Your employer withholds money from your paycheck for things like social security and medicare.
• Your employer will send you a W-2 that outlines your earnings and what was withheld (subtracted from your pay and sent to the government).

— Self-Employed

• Not so straightforward…
• There are two major considerations:
  • Hobby vs Business
  • Business Structure

Hobby vs. Business — Does the government consider your practice a hobby or a business?

• Are you making a profit? Yes? — Probably a business
• Does the profit represent more than 2% of your income? — It’s a business
• If it’s a business, you have to report the income to the IRS and pay taxes.
• If it’s a hobby, you normally don’t.

Business Structures — The type of business structure affects the types of taxes you pay.

• Sole P — Everything is considered one income.
• One-member LLC — The IRS treats you like a Sole P. It’s all one income.
• Partnerships — You pay income tax for the % of the partnership you own.
  • For example, if you own 10% of the partnership, you pay income tax on that 10% of the profits.
• Multi-Member LLC or S Corp
  • An LLC can be a pass-through (Works like a Partnership)
  • Or you can be your own employee (Pay both personal income tax and corporate tax for the LLC)

The tax implications of Employee vs. Self-Employed are pretty major

Employees:

• You just pay income tax — Usually 12% & 22% on your taxable income.
• Your Employer has already taken care of the employment taxes:
  • What they withhold is the part what you pay into social security and medicare: Approx 7.5%
  • They also have to pay into social security and medicare: Approx 7.5%

Self-Employed:

• You pay income tax PLUS all of the employment taxes.
• That’s the (usually) 12 & 22% PLUS approx. 15% (7.5%+7.5%).
• Your tax burden could be almost 27-37%.

Let’s look at a tax calculator…

Deductions

What is considered taxable income essentially just refers to your profits.

• Remember from Finance Basics: Income - Expenses = Profits
• Deductions reduce your taxable income.
• So, in a way… Yearly Income - Deductions = Taxable Income
• The lower the Taxable Income, potentially the less taxes you have to pay.

» Automatic Deductions

First, there are certain categories that the government will automatically not tax, therefore lowering your taxable income.

These include things like retirement account contributions.

» Applied Deductions

Then we have to apply deductions for personal income taxes. There are two methods for applying deductions: Standard and Itemized

— Standard = An set amount of money you get to automatically deduct.

• The government determines what this amount is.
• What’s your standard deduction? Back to the IRS site!

— Itemized = Listing out and adding up each individual deduction you qualify for.

• If your itemized deductions are less than the standard deduction, you have to use the standard deduction.

For personal income, you can only pick one method: standard or itemized. Pick the one that saves you the most money.

For Business deductions, you apply these deductions IN ADDITION TO your personal deduction.

What are deductible business expenses?

Here's a short list:

• Materials and supplies
• Studio expenses (rent + utilities)
• Advertising
• Travel
• Vehicle expenses
• Fees paid (To enter competitions, fairs, etc)
• Vendor fees (paypal, etc)
• Contract fees (That you pay to other contractors)
• Large equipment (Like a laptop, table saw, welder, loom, etc)
• Legal and professional services (Lawyers, accountants, etc
• Repairs and maintenance (of things like your equipment)
• Cell phone costs
• Education costs
• Conference expenses
• Relevant cultural events
• Books, magazines and reference material
• Film and processing
• Framing
• Home office expenses
• Software subscriptions
• Business insurance expenses
• Business meals
• Business gifts
• Office supplies
• Taxes (other than income tax)
• Tax preparation fees
• Postage
• Couriers
• Internet

— Itemizing expenses in creative practice

$5,000 (earned from a sale of artwork)
	MINUS
$4,000 (Deductible expenses used to create the artwork.)
	EQUALS
$1,000 (Taxable Income)

INCOME TAXES THAT APPLY: 12% Income + 14% Self Employment

	— WITH DEDUCTIONS, YOU PAY IN TAXES: $260

	— WITHOUT DEDUCTIONS, YOU PAY IN TAXES: $1,300

Filing

Regular Employees: Once a year

Self-Employed: Quarterly

I'm going to cheat and just refer all of you to this excellent article on how to do your taxes as an artist. The author does a far better job than me explaining how the various forms and filing work:

A smart artist’s guide to income taxes · The Creative Independent