Taxes on Art/Fursuits/Fursuit parts/Etc

[lackoflollies.livejournal.com]

Not a beware, a seeking advise post. I've been wondering something lately, and I am willing to bet someone here knows, or at least knows how I can find out this information:

What is the policy regarding filing taxes on art? I was informed by a friend that I HAVE TO file taxes or else i'll get into huge trouble with the IRS.. and I don't want that. I was always under the impression that art, unless you made a significant amount ($1,500 or more) that you didn't need to bother, since it wasn't something the IRS was 'worried' about, then again this is what my Grandfather told me, who sells books online on Amazon, and makes a pretty decent profit doing so, but it's also his hobby.

So i'm coming here seeking advice, thanks a bunch for reading.

For specific tax information I live in the state on Illinois (since I know sometimes they differ by state, at least as far as state taxes is concerned, federal is just that.) and i'm considered independent because I live on my own, so I claimed myself on my W2 at work.

Comments

[mariechan.livejournal.com]

I did find this link if it's helpful:

http://dontmesswithtaxes.typepad.com/dont_mess_with_taxes/2009/03/hobby-or-business-tax-issues-for-both.html

Anyways, it's been a few years since I took Taxes I and I no longer have the textbook, but if I recall the IRS counts income as from any derived sources which include hobbies. You can deduct expenses but only up to $1,000.

Personally I don't report mine because I don't make enough money in general to file an income tax return.

[lackoflollies.livejournal.com]

I'm sorry, this is still confusing. In lame-ens terms, unless I make $1,000 or more, don't bother?

[theredwolf.livejournal.com]

"First, your hobby-related deductions are limited to the amount of hobby income you report on your tax return. If you made $1,000 on the photo shoot and spent $1,200 for the supplies, you can only count $1,000 of your expenses.

Second, you have to itemize to claim the expenditures. They are counted as part of any miscellaneous expenses you have on Schedule A. And your miscellaneous expenses must exceed 2 percent of your adjusted gross income before you can deduct them."

To paraphrase, if I understand correcting (There is the biggie, if I understand..:P), you need to make over $1,000 in income, and then in order to report it you would have to itemize your tax return to reflect any supplies you bought through-out the year.

[taasla.livejournal.com]

You have to report anything over $800 to the IRS as income. You may also claim up to $1,000 in deductions. A deduction would be, say, your Paypal fees that you paid. You can certainly claim all of those.

[lackoflollies.livejournal.com]

This makes much more sense. x_x Thanks for clarifying. I guess i'm just.. not quite used to the idea of doing this stuff on my own yet; I've only been moved out a month, so i'm not sure what things mean, or how to go about them, or evwn where to look in regards to the rules and regulations.

[nambroth.livejournal.com]

In addition to the above posters, it is important to note that the minimum income that the IRS requires in order to file a tax return is INCLUDING any normal income you get from a job elsewhere.

That is, if I make $5,000 in a year at a part time job somewhere as reported on my W2, and make only $100 in a year on art commissions, the IRS sees that as $5,100 total (they-- the IRS-- KNOWS about your W2 earnings since it is reported. It is technically up to you to report any other income. Some people do, some don't-- but don't ever get caught if you don't). It is misleading to look at your creative income and your 'normal job' income as two separate entities in relation to how much you need to make in order to file.

It's up to you if you want to count your side earnings as a business or a hobby. Each has pros and cons. Really, and I know it's a pain to hear it, but for the first year it's very helpful to talk to a tax professional (that is educated in self-employed earnings) because at first it's all very confusing, but after you do it for a few years it does get 'easier'.

[lackoflollies.livejournal.com]

"but for the first year it's very helpful to talk to a tax professional (that is educated in self-employed earnings)"This was something I was gonna actually look into, I figured i'd come here first before I paid for someone's services.

[nambroth.livejournal.com]

I think that there are low cost or possibly free volunteers that are around to help creative individuals, but for the life of me I can't remember for sure. I lost a bunch of my bookmarks recently and I can't seem to find the site I was thinking of. My memory is pretty bad though-- perhaps I am not remembering correctly!!
I know that some localities (often held at public libraries) offer free workshops for self employed individuals as well. It might be worth checking out!

Just so I am not being totally useless, here is a link to get you started:
http://taxes.about.com/od/taxplanning/a/freelance.htm

[lackoflollies.livejournal.com]

I live in a college town, so I might be able to find one of those panels tou mentioned, and I will definitely bookmark that link, thank you!

[greenreaper.livejournal.com]

I suggest you file taxes (http://www.irs.gov/newsroom/article/0,,id=175963,00.html) as a sole proprietorship (or if you're serious, a more organized form) using Schedule C or C-EZ as appropriate. You can then deduct relevant expenses against income directly. If you treat it as "other/hobby income" then the hobby expenses can only be deducted once they exceed 2% of your adjusted gross income - and you have to forego the standard deduction, which is often better than itemizing deductions.

The down-side: you probably have to pay self-employment taxes (Schedule SE), unless net profit is below $400 or so per year, and you also have to make a profit in three out of five years or they start questioning whether you're really running a business (there are various other factors (http://www.irs.gov/irs/article/0,,id=186056,00.html) that may apply).

Note that state and local sales tax may apply, too, wherever you are carrying on a business. For example, if you go to MFF, and sell there, you owe money to the local authorities.

[greenreaper.livejournal.com]

The $1000 there was just an example - it's not a concrete figure. If you made $500, you could only deduct up to $500.

What they were saying was that you cannot "make a deductible loss" on a hobby - you can only fail to make any profit. And then, you can only deduct from that profit if you meet the "above 2% of AGI" rule for miscellaneous deductions.

[greenreaper.livejournal.com]

I don't report mine because I don't make enough money in general to file an income tax return.

You may be missing out. The Earned Income Tax Credit (http://www.irs.gov/individuals/article/0,,id=96406,00.html) is refundable, meaning you're leaving money on the table if you don't file. (If you saved any money in a retirement fund, you could earn even more from it by adding the Savers Credit (http://www.irs.gov/newsroom/article/0,,id=107686,00.html) to cover any tax which you would owe if not for EITC.)

[lackoflollies.livejournal.com]

This makes sense, it'll make more sense when I get to talks with a tas consultant, if it gets to that point. I don't want to break any laws, but I also don't want to waste my time and money.. but better safe then sorry, right? :)

Thank you for your advice.

[greenreaper.livejournal.com]

You're welcome. As for the consultant, up to you! I think if you talked with more people who do this regularly, you'd feel more comfortable about it. [FWIW, legal tax advice is itself deductible, but only according to the "above 2% of AGI rule" (and only if itemizing, which again may not make sense for you).]

[theredwolf.livejournal.com]

Ah! Thank you, see, I misunderstood. Thank you for the clarification!

[fenris-lorsrai.livejournal.com]

They may get you for Social security and medicare taxes. that always takes a much bigger bite of my taxes than the income.

also, its good to report SOME income because SS is based on X number of years averaged. If you have some columns with NO income, it starts taking a big chunk out of SS/disability down the road and you may need to delay retirement much later to fill a year with a non-zero number. My father ran into this with a few too many years of his business reporting zero net income. oops.

[lackoflollies.livejournal.com]

I think if you talked with more people who do this regularly, you'd feel more comfortable about it.

Probably, but like I said.. i've only been on my own a month, and have a lot more to worry about now then I have in the last 21 years. So, i'm a tad worried and scatterbrained.

[snobahr.livejournal.com]

Tax professionals don't bite. Honest. We recently started our own business, and our accountant is really nice, very helpful, and extremely supportive.

[lackoflollies.livejournal.com]

That's good to hear, haha.

[kriscynical.livejournal.com]

I use my dad's CPA for my taxes. For all clients I do work for within the state of Texas I have to charge sales tax. For Texas residents as well as every job I have, private commission or for a company, I report the income to the IRS along with all business expenses I have throughout the year like my business cell, supplies, website server fees, etc. I also make significantly more per year on my work than $1500 (not meaning that to brag, I mean it that I'm above the cut-off for supposed requirement for filing).

All of my deductions have balanced out my income in the last few years to the point that I had to pay a whopping $12 last year. lol

[kriscynical.livejournal.com]

I use my dad's CPA for my taxes and I claim a hell of a lot more expenses than $1000. Are you absolutely sure that's correct or maybe I'm just misunderstanding here (which is entirely possible since I just give the CPA my records and he gives me back a return to sign)...? O_o

[kriscynical.livejournal.com]

Yes, I second this. My CPA is a pretty awesome guy who makes sure I pay every bit that I owe, but not a single cent more. CPAs can also protect you from the IRS going after mistakes.

My CPA loves the way I keep my records:

- Itemized expenses per month with a total for each month (with computer equipment specially marked since those depreciate over time)

- Each job/commission I do is numbered, and I have an invoice sheet for each with when payments were made in what form and what the payment was for

- A summary page that has the totals for each job along with their corresponding job number

- A monthly breakdown of my paypal activity with a summary page

- A summary page of my income and expense totals for each month with a year's grand total at the end

- A section that has all the receipts for all my deductible purchases, both printed out from e-mails and regular register receipts stapled to sheets of printer paper

- A listing of how much I donated to which charities and foundations, including my yearly donation to my college's student scholarship fund, etc.


If you keep track of all these little things as you go through the year then once it comes time to do your taxes (or take them to a CPA), all you have to do is add up your monthly totals that you kept throughout the year. I do it this way, which is why it only takes me about two hours to get all of my tax materials together in a divided binder for the CPA while it takes my dad a couple WEEKS because he leaves all of his for the end of the year.

[greenreaper.livejournal.com]

Agreed with respect to SS/OASDI. You have to pay SS tax to earn credits (http://ssa.gov/pubs/10072.html), otherwise you won't qualify for regular retirement or disability benefits.

Indeed, it's a much better deal for those paying in a little (http://www.ssa.gov/oact/cola/piaformula.html) (but not nothing) than those paying in a lot over the course of their lives. The monthly benefit is based on the average of your top 35 years of earning, up to the limit on SS tax each year. It's heavily skewed to pay maybe 90% back from the first chunk (currently the equivalent of $767/month), then 32% from the second (the rest up to $4,624/month), then 16% from the third (everything else).

For example, if you only earnt the equivalent of $767 over your life, your "insurance amount" might be $690/month. However, if you made $4,624 (and paid taxes on those earnings, it'd be $994/month - more, but not six times more.

Of course, with the current forumla you can earn a lot in say 10/15 years and still get a relatively good deal, since it'll average out to less over 35 years.

[loregryph.livejournal.com]

Yes, you have to pay taxes on your "other" income. My own rule of thumb is to put at least 20% of my art and costuming earnings aside into a savings account so that come tax time, I should be covered.

I also have spreadsheets to keep track of materials purchased, other expenses and orders (including running totals for earnings each month). All my receipts go into a box for storage. Doing it this way is MUCH easier than trying to figure out everything at the end of the year! Makes it much easier for the tax guy too!

[lackoflollies.livejournal.com]

This is a good idea, thank you.

[mariechan.livejournal.com]

I think the expense cap of $1000 only applies to the hobby income, which means that you get a better deal if you can classify your hobby as a business.

[mariechan.livejournal.com]

I make less than $100 a year on commissions though and everything else is babysitting money. I know I might be missing out but I think I just want to get a job before I even start getting into taxes.

(I guess it's a bad attitude for an accounting student about to graduate with a bachelors :/ )

[greenreaper.livejournal.com]

The original commenter was mistaken; the $1000 was just an example (if you made $X, you couldn't claim more than $X as hobby expenses).

[zrcalo.livejournal.com]

so you dont have to file taxes unless you earn more than $5000 a year?

I make about $2600 a year and thats just to pay for rent and food. I think every month I make about $220. I cant even afford my car insurance. (luckily I have family that can)

what if you're still "technically" considered a dependant? I read that you can be a dependant until the age of 25.

[taasla.livejournal.com]

I honestly would suggest you hire a professional to do it. It may be expensive from the get go, but they will be able to help you and you can certainly avoid being audited.

[greenreaper.livejournal.com]

Ask the interactive tax assistant (http://www.irs.gov/ita/), bearing these credits (http://www.irs.gov/newsroom/article/0,,id=105097,00.html) in mind.

Whether it makes sense to be claimed as a dependent is itself an important tax question for some people.

[elmenora.livejournal.com]

I'm not a tax pro, so take this with a grain of salt.

To my knowledge, you technically have to file taxes on ALL income, no matter what source. Even if you only make a few bucks on it that still counts as income and still needs to go on your taxes. The hobby/professional distinction is important because there are some differences in HOW the money is taxed and what you can claim as deductions, etc.

Practically speaking if you're only making a couple hundred a year, the IRS probably won't notice. They've got bigger fish to fry.