Managing Your Money (continued)
A Quick Note on Taxes
As a business, you’ll need to pay different taxes than you did as an individual. As noted in the Business Structures lesson, the types of taxes are determined by the structure and how the income of your business is reported.
In addition to taxes on income, other taxes may come along as you go from being a creative to a business. This can include self-employment tax, employment taxes if you add staff, sales tax on products sold, and a Business & Occupation Tax, which is levied on the business’ gross profits.
The Mastering Financials section has much more detail on this subject, and it’s best to use the services of an account or bookkeeper to help you do your taxes. Sites like TurboTax are acceptable for individual tax filings, but a good accountant will know a lot more about how to get the most out of your chosen tax structure, including what you can and can’t legitimately deduct.
A couple of other things about taxes.
First, make sure you keep up with your tax payments. It’s easy to convince yourself that you’ll make them up later in the year, but rarely does that happen. The IRS doesn’t have a very good sense of humor when it comes to the money you owe him.
Second, it can be very tempting to report your income as low as it can go. This will reduce your near-term tax obligations, but it will also sock you hard down the road when your retirement benefits are being calculated as you reach retirement age. It will also make it really hard to get a loan for a car, home mortgage or the business.
Promised we’d be quick.
Introduction: Are You Ready?
1. Thinking Like a Business
2. Business Structures
3. Access to Capital
4. Creating Revenue Streams
6. Finding Customers
8. Creating a Winning Pitch
9. Effective Negotiation
10. Intellectual Property
11. Managing Your Money
12. Going Global
Rainy Day Planning
Running a creative business can be exhilarating when the money flows in. When my own business started, we were doing film production work which meant a nice $5,000 check every week a production company was in town. We were living in style, going so far as buying a round for the house at our favorite bar. Then the production dried up for a spell. We didn’t understand the importance of putting money away for those dreary days when no work and no money was rolling in.
As you plan your business and your finances, try to keep the flow as even as possible. It’s wonderful if it continues to rise all the time, but you want to be able to weather those periodic downturns when you’re in a sales cycle instead of doing work, or waiting for a big assignment to come through the door. And you will have dry spells. Every business large and small does.
Worse, there will be times when you experience an emergency, whether it’s a personal health issue or a problem with your computer, band saw, pottery wheel or what else you use to generate income. You not only have to cover the cost of the repair but also the downtime. If you can’t work, you can’t make money and will have to use your reserves to keep your business and personal life chugging along until the crisis passes. And don’t forget any natural disasters, such as a flooded main street that leaves a foot of water in your shop.
The same can be true for your expenses, at least the variable ones. Sure, you’d love to write off that new Apple computer that just came on the market, even though yours is just fine. Or the Triple Play package on cable that gets you all the movie channels plus major league baseball and the Seahawks. These are rookie mistakes. Remember, you’re trying to build a sustainable business where you can live a creative life, not a life that your friends will envy you for because you can watch the blockbuster that’s still in theaters.
Speaking of expenses…
Don’t forget to look under the cushions as you look for legitimate tax deductions. If you are a costume entertainer, you obviously want to write off your costumes or the materials to make them if you do it yourself. As a musician, don’t forget strings, a new tuner, PA or mic. And you can always get that dreamy collector Gibson if you actually get paid to do gigs and aren’t just playing it at home for your dog. The same is true for any creative pursuit. As long as you can defend it to an auditor and clearly show that it is used for and in your business, you have a legitimate right to claim it. Just know that the U.S. Tax Courts may be brought in to make a final decision if you’re being a bit too creative with your deductions.