Voice Over Freelancer Tax Tips, 2015 Edition PART TWO
Feb 13 2015
NOTE: This is the second post in a two-part article. Click here to read part one!
As we noted in our previous installment, the art of voice over is also a business. As your voice over business changes over time, so might its needs. And so might its tax-related opportunities. Here’s a list of some things you may have been too busy to deal with before, or may have overlooked …
Reminder: Estimated income tax payments are due quarterly.
If you don’t file and pay estimated taxes when due, you may incur penalties when you file at the end of the year. That’s just one reason for keeping timely, accurate records. For estimating taxes, said tax accountant Jonathan Medows in a December 2014 interview with Freelancers Union, “a third of your estimated profit, I think is always a safe figure. You may owe a few dollars, you may get back a few dollars, but that’s always a safe number in terms of estimated tax planning.”
Reminder: You may apply for an extension of the filing deadline, but your taxes are still due by April 15. It’s an extension for submitting your forms; it does not extend the deadline for payment. Since you haven’t done your forms yet, you’ll have to estimate the amount due. See above.
Consider the possibility of deducting your home studio. The IRS guidelines for home-office deductibility changed over the past few years. If the nature of your office/studio has changed sufficiently, or if you weren’t aware of the new way of calculating a home-office deduction, refer to a tax professional who is up-to-date on these rules and regulations. Meanwhile, you can learn about it generally in this tax article from 2013.
Become a business in the eyes of the IRS. Until you demonstrably become a business, the IRS considers you no more than a hobby. You can’t deduct hobby expenses. However, the IRS does not say you necessarily have to make a profit. The key factor is whether you are actively promoting yourself and available for hire. So print up your business cards, send out carefully targeted letters, set up a website, and be ready to sell and perform.
However, one equally important point: Few things will shut the door on your VO business prospects than marketing yourself widely when you’re not able to perform at a professional level. So resist the temptation to post a premature demo, limit your promotional contacts perhaps to people who already know you, and work with a demo coach to keep your demo plans moving and your broader marketing program ready.
Keep accurate, contemporaneous records of all your expenses related to voice-over work, even before you officially declare yourself open for business. Open a separate bank account for your voice-over income and expenses, and don’t mix it with your personal finances. “Pay” yourself from it. Although, if you are a Sole Proprietor your assets and your business’ assets are in the same pool, segregating your voice income and outflow will at least help with recordkeeping and business status. By the way, keep your receipts; lines on a credit card statement may not be sufficient backup.
Remember that the IRS can ask you questions years from now, long after your memory fades. In fact, your deduction might also have faded – as practicing tax accountant June Walker advised on a 2012 Edge Studio Talk with a Pro Business and Money call-in, take a photo of your home office. Suppose that, by the time you need to document your deduction, you’ve turned it into a spare bedroom or something!
Know what’s deductible and what’s not, but don’t let it be your only deciding factor. Once you are a business, you should be able to deduct marketing and other expenses. Naturally, from a business standpoint, your first concern in making them is whether they will help your business run and grow. From a tax standpoint, the issue is whether the expenses are “necessary and proper.”
If you were not yet a business when you spent the money, you can probably deduct certain preparatory expenses (such as consulting a lawyer, an accountant, buying supplies, website development, etc.) as “start-up costs.”
“Start-up costs are treated differently on your tax return,” June Walker said in our 2012 Talk with a Pro call-in. “When you go into business, then you can take the startup costs as a deduction, and they are deducted in a certain way on your tax return, in a different way. The ideal thing is to get those business cards made and start offering your services as soon as you can, and then spend your money. It’s much more tax advantageous.”
She also noted, that education expenses “are not start-up costs. … If you’re not in business, you’re not trained to do voice over, you cannot deduct your classes. ”
Writes attorney and voice actor Robert Sciglimpaglia Jr, in his book “Voice Over Legal”:
“In general, you cannot deduct, as a business expense, the costs of education to learn a new trade or business. But you may deduct the costs of education to maintain or improve your skills in the voice over profession.”
“The quicker voice talent treat voice over as a money-making venture, the better off they will be, in my opinion, not only for tax purposes, but also in obtaining clientele and increasing income.”
[But remember our caveat about premature promotion, above. – Editor]
However, there might be educational tax credits and other programs that you might qualify for, helping to ease that investment.
“There are a lot of tax credits for education,” Ms. Walker said. “It’s very complicated, but there’s lifetime learning credits for those who’ve already got a bachelor’s, different credits for someone in their first two years of college, different credits for someone who’s in their second year, tuition deductions, student loan interest deduction, there’s a ton of stuff out there. You have to figure out which is the best credit for you. Be sure if you’re paying for classes, whoever does your tax return, let them know.”
Again, also see our 2013 tax article for additional insight:
6. Keep track of who pays you, when and how much. Take note of which income is “W-2 income” (deductions were taken by the employer) and which is “1099 income” (no deductions were taken, and you’ll be liable for Self Employment taxes).
Employers of freelance talent (if the talent is not incorporated) are required to file a 1099 if you were paid at least $600. But if they fail to file the form, but you are nevertheless required to report that income. In fact, you’re required to report all income, including annual amounts under $600. If you haven’t received an expected 1099 by end of February, it might be wise to remind that employer.
A copy of the 1099 needn’t be included with your tax return, so (assuming you have your own accurate income records) opinions vary on whether to ask for a replacement 1099-MISC. Some people suggest it may invite further error. Be sure the employer just sends you a copy, and does not actually issue two forms; you don’t want the IRS to count the income twice.
And if you don’t like the idea of reporting every dollar, you might take solace in the fact that Social Security payments (at least historically and for the foreseeable future) are based on an average of most of your earning years – if you make significantly more over time, you may receive significantly more when you retire.
Should you consider incorporating or forming an LLC? Or use some other tactic to limit your liability? Very important to note is that this issue is not a no-brainer; don’t make any such move without fully understanding not only how to do it, but also what it is and why you would benefit.
For one thing, realize that a “Limited Liability Company” is a legal entity, not a tax entity. For example, you can be both an LLC and a Sole Proprietorship. Confusing? Yes. We’ve come across even a Wall Street Journal article that seems to have mistakenly referred to an LLC as “incorporation.”
The requirements and benefits of LLC status are defined by each state, and vary state-by-state. “Status” might be all you really enjoy from it; depending on your state, and your ability to meet (and keep satisfying) the state’s requirements, you might not be legally protected if you ever wind up in court. The supposed benefit might not be worth the initial LLC formation fees, hassle and delay, which in some states can be hefty, let alone possible annual renewal taxes, fees, paperwork, etc. In fact, your tax or legal advisor might suggest simply boosting your liability insurance coverage instead.
And you can get back to the fun part of your voice over business.
This article is intended to provide general guidelines on matters of interest to voice over artists. It is not intended to be all-inclusive. The application and impact of tax laws can be very complex and vary widely from case to case. Readers are encouraged to seek professional advice concerning specific matters before making any decisions. The author and publisher disclaim any responsibility for positions taken by taxpayers in their individual situations. This article was updated February 3, 2015.
IRS Circular 230 Disclosure: Any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding tax-related penalties or (ii) promoting, marketing or recommending to another party any investment plan, transaction or matter.