Taxes and Selling Your Artwork?

[Lurial]

I apologise if this thread actually belongs in the Employment Discussion forum. I wasn't exactly sure where it really should go. I'll delete and repost it in the right section if people feel it's in the wrong area.

Anyhow, I've recently been entertaining the idea of creating and selling portraits of people and/or their characters to make some 'for fun' money. Especially as my parents have forced me to quit my old job while attending college unless it is a job that involves art. (They weren't happy with the one C- I got amongst the rest of my A's and B's.) Making portraits is pretty relaxing and fun for me, so I figured it would be a nice way to make cash, while also not overwhelming me or heavily encroaching upon the amount of time I have to work on the 40+ hours of homework my art school dumps upon me a week.

I was all ready to go at it when a friend mentioned taxes and how the IRS might slap me with tax evasion if I wasn't careful and didn't report my earnings. This threw a wrench into my cunning plans of portraiture as I have no idea how taxes and all that work when you're making money off of art commissions rather then working for someone else. I tried looking up self-employment tax on a US government website, but got scared that there was possibly more to it or something I was missing that I was unaware of. Thus, I figured I'd post here and hopefully get a bit of correct information or at least a helpful link from an artist who actually knows what they're doing in regards to taxes and commissions.

So.... anyone able to help out a poor, clueless college student? It would be greatly appreciated!

[pitabread]

Not exactly sure what the rules are in the 'states, but if it's anything like Canada, you just include it as self-employment income. You could also technically write off things like your art supplies as expenses, too.

Just Googled the IRS rules and apparently you have to pay a "self-employment tax" of about 15 percent if you make more than $400 net earnings (i.e. after expenses). Not all that different than CPP contributions up here I suppose...

[Smarty]

erm cash in hand?

[Elwell]

The bad news is, if you make enough, you will have to pay taxes on it.
The good news is that all your material, supplies, software etc. count as expenses against your income. You can even operate a business at a loss for up to three years and take that as a deduction against other income.
Once you are up and running you'll have to pay you taxes quarterly (since they won't be getting withheld from a paycheck), but this isn't a requirement for the first year.
Basically, don't worry about it over much to start with, but do keep good records. Come tax time, consult an accountant or tax preparer who's familiar with self-employment issues.
DISCLAIMER: This is not official legal or financial advice. See a professional.

[dbclemons]

This site (http://www.theartrepreneur.com/library/tax_guide_artist.asp)breaks down the general tax situation for artists in a good basic manner.

[Black Spot]

That’s a pretty good site. As the world is now moving towards international accounting standards, what goes in the UK probably goes in the US, so if you want to ask me (its what I do) if something can be used as a legit expense, ask me and I’ll try to give you a very good reason why it should be allowed. Use a percentage of the materials bought as an allowable expense – as you’re studying you won’t away with all of it. Make a good reason why the percentage should be higher like practicing the look requested. Don’t forget that failed commissions are all part of the business as is any expenses incurred. Every phone call drumming up business, your website, all that research (magazines, books etc) can all help; that they may help you in your studies could be incidental if proven vital for a commission.

[Lurial]

Thank you so much for the advice folks!

[kool-ka-lang]

So if you make less than 400$ a month selling paintings, you won't need to deal with taxes, even after a year? small enough earnings that they won't care?

[pitabread]

Not $400 a month, $400 per year.

[Shehaub]

Keep in mind that when the IRS computes this it is:

total sales/yr - cost of good sold/yr = profit/yr.

That is your basis. When you add up these totals, make sure you include every scrap of paper you tossed out as unused sketches, the price of the pencil, paper, light bulb in the lamp you worked under etc as cost of goods sold.

How do you distinguish between a business and a hobby? (http://www.irs.gov/faqs/faq/0,,id=199650,00.html)

There are advantages and disadvantages to staying a hobby vs business. Depending upon the amount of sales you do, your other sources of income and your current financial situation there are pro's and con's of each. My advice is to go to a tax pro and ask questions.

[cirekoy]

Taxes can be tricky, and I'm not legally a tax expert, but I do know that any commissioned artist can be considered an independent contractor (1099) in the US. I don't think anyone would question your relationship with your clients as anything other than that.

An independent contractor does not have to report income made from a client unless it is more than $600 per calendar year. Each client counts differently, so if you charge $599 per portrait and have no repeat business, you wouldn't have any obligation to report that income. Having a signed contract for each client would help here, so you can keep it all straight.

This would probably make sense for you, allow you to avoid taxes, and still be legal. Again, I can't say I'm a tax pro :)