5 Taxes Creative Entrepreneurs Should Know
Taxes for business can be overwhelming and stressful when you do not understand them. There are a lot of different kinds of taxes; Sales Tax, Income Tax, Self Employment Tax, and even Payroll Tax! I hear from creative entrepreneurs all the time that taxes get really confusing and it is completely understandable. I’m going to go through the five taxes every creative entrepreneur should know so you can handle taxes like a pro!
Federal Income Tax for Creative Entrepreneurs
The first tax we are going to cover is Federal Income Tax. This is a federal tax imposed on your income. This is paid to the IRS, and this is something that you file annually every year on that little form called the 1040, that you’re probably familiar with or you’ve heard of before.
State Income Tax for Creative Entrepreneurs
Then you have State Income Tax. Not every state has income tax. In fact, there are nine states that don’t, and those are Alaska, Florida, Nevada, South Dakota, Texas, and Washington State. Wyoming has a levy, but not an income tax. New Hampshire and Tennessee, do not tax wages. They do currently tax interest income and investment income, but that’s soon to be removed as well.
Self Employment Tax for Creative Entrepreneurs
There is also Self Employment Tax. Self Employment Tax is a 15.3% tax imposed on self-employed individuals who are not S Corporations. This means that you file a Schedule C with your personal return and the income minus expenses equals your net income. That net income number is what your 15.3% self-employment tax is calculated on. And this is to make up for not paying into payroll tax, which we’re about to talk about, and then you’ll see how that makes sense. I cover Self Employment Tax in a deeper dive video linked below called How To Pay Yourself From Your Creative Business.
Payroll Tax for Creative Entrepreneurs
Here we have Payroll Tax. If you’ve ever had a job and received a paycheck and you got your pay stub, you’ll notice on the pay stub, all these various withholdings and deductions. That’s known as Payroll Tax. Payroll Tax is made up of FICA, which is Social Security. So you’re paying into your Social Security 12.4%, and Medicare, which is 2.9%. When you add these together, you get 15.3%, which is oddly the same amount as that Self Employment Tax we were just talking about. However, when you’re on payroll versus self-employed your employer pays 7.65% and you pay 7.65%. A split it down the middle. When you’re Self Employed, you pay the whole 15.3%. You can get a more indepth look at this here. These taxes being pulled out are paying into your future, which is Social Security and Medicare that you can collect when you’re at the appropriate age.
Sales Tax for Creative Entrepreneurs
Last but not least, there is sales tax. Sales tax is different in every state. So it’s very important to understand your state sales tax laws, as well as any state that you do business in. There are five states that do not have sales tax, Alaska, Delaware, Montana, New Hampshire, and Oregon. Every other state has some sort of sales tax. Some states will tax services and some don’t. Some states tax digital products and some don’t. So it’s super important to understand your state sales tax laws and realize that you may not live in a certain state, but doing business in that state could subject you to the sales tax requirement. I cover this topic in depth in my blog post, Sales Tax 101. I go through everything you need to understand to do the research for your state and those you do business in so that you’re compliant. Sales tax can be so tricky.
How to Handle Taxes for Creative Entrepreneurs
Those are the five taxes that you should know as a Creative Entrepreneur. Federal Income Tax, State Income Sales Tax. All of these taxes are filed separately. Federal Income Tax goes to the IRS, State Income Tax goes to your state. Self Employment and Payroll Tax both go to the federal government for Social Security and Medicare, but it depends on if you’re employed or employed through your business as an S corporation, or if you are a Sole Proprietor, DBA, Single Member LLC, Multi Member LLC, a Partnership, then you are paying the Self Employment Tax on your tax return. You can get all the information you need on Business Entities here. Sales Tax, which varies by state and is very tricky. In my Sales Tax 101, you will get a better understanding of exactly what you need to know.
I hope that this helped you understand the 5 taxes you should know as a Creative Entrepreneur. You can grab more support and resources for your creative business in my community, #CreateMore with Tiffany. Every Friday, you can grab my LIVE Coaching Call on topic just like this! If you are ready to get your financial sh!t together and makeover your creative business bookkeeping, join Master Your Bookkeeping. Doors close August 31st, 2020!