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As a creative, it’s easy to want to come up with something really unique and carry on with business but making sure everything is in order financially fits into that equation. While thinking about numbers and bank statements or even keeping good books for accountability sounds like a different language, it’s a necessary evil to know how things are going and grow your business.
First things first. If you’re wondering why you even need to bother, there’s this little thing called taxes that can make your life really miserable. Bookkeeping is definitely a thing and taking care of it, in the beginning, can save you lots of time and money. Bookkeeping for artist expenses doesn’t have to be hard, just like bookkeeping for musicians or bookkeeping for photographers. All of these are creative spaces that generate income. If you’re a legitimate business, you can’t avoid it.
Here’s what you need to know about bookkeeping for independent contractors and why it’s important.
Start at the Beginning
Before we get into anything else, there are a few things you can do to make things easier:
• Do not co-mingle funds.
Keep your personal expenses away from the business ones in all transactions. Credit cards, bank stuff, Stripe, PayPal – keep it all separate.
• Use software.
Using software is much easier than writing it all down. Schedule time to enter all your receipts when you don’t use a card or electronic transfer.
• Use a guide.
Looking at all the categories on a spreadsheet can be confusing. Work from what the IRS gives you (Schedule C) and add from there.
• Match everything up at the end of the month.
This is also called reconciling your accounts. Do this every month.
• Get an accountant.
When it comes to filing taxes, doing it yourself sounds good, but if you don’t have a clue about accounting, save yourself the hassle. You can easily miss deductions. This is a necessity and it’s worth the money.
Make it Make Cents
Making sure you are keeping track of what you spend and keep not only helps with your taxes but you may be classified differently if you keep losing money. Uncle Sam can quickly view you as a hobby rather than a business. While it all sounds hard to do, here are the basics:
This is the money you make – all of it. That means payments, royalties, awards, and money you’ve received for work that may still be pending. They also call this revenue.
This is money you pay – all of it. As an artist, the paper you use, brushes, any subscriptions for music, and tools you need for photography. Your supplies or operating expenses help keep your business going. You need to know where every dollar goes.
There’s a formula for that: Income – Expenses = Profit. Profit is what’s leftover and determines whether you’re making money.
At the end of the month, you should have an income report or P&L (profit & loss) statement that will indicate how you’re really doing.
What is a P&L Statement?
A P&L (or income statement, covers income and expenses for a specific time period. There is an equation of how it works:
Revenue – Cost of Goods – Operating Expenses = Net Income
The cost of goods sold may confuse you, but it’s really all about your products and services. If you sell a painting, it’s like considering the cost of the supplies you needed to create the painting, the labor, your time, the costs of taking it to display, an associated marketing and setup costs, shipping costs you incurred, and the cost of goods you may have purchased for resale. Then the operating expenses are subtracted. That provides you with a net income. Your gross profit is the total cost of your sales from total revenue.
What’s an Expense?
Even though you should be tracking everything you spend for the business, it can be confusing. The IRS gives specific information on “ordinary and necessary” items to successfully run your business. As an artist, that can mean a lot of different things, right?
The rule of thumb is if you’re using it for business, go ahead and record it. Your accountant will be able to let you know if you can’t. Your needs vary if you’re an artist, musician, or photographer. Don’t discount the things you need to keep business flowing. Here are a few examples of deductions:
• Studio rentals
• Fees paid for admission to a park, etc.
• Fees paid to rent a park, etc.
• Event fees
• Supplies and materials
• Sales tax
• Legal fees
• Equipment rentals
• Travel and meals
• Membership fees
• Home office/studio
• Office supplies
This is just a general list, but there are tons of deductions based on what you need to keep operations going. All receipts should have the date, description, how you paid, the amount, and any tax.
This may seem easy enough, but if you’re really busy, it can be hard keeping up with it all. Using a good bookkeeping tool for artists can help. There are free and paid versions of software. These are some of the popular ones:
QuickBooks is one of the most powerful and well-known software platforms on the market for accounting. There are many different versions based on the type of business. QuickBooks also has a desktop and online version. QuickBooks Self-Employed has a phone app, as well as an online version to keep you on track while on the go. There are pros and cons to this software. While powerful and popular, it can be expensive and confusing to use. There are a lot of capabilities, and it plays nice with accountants, but the learning curve may not be the best for creatives that just want to import their stuff and go.
When it comes to accounting software that was specifically built for artists, you’ll think of FreshBooks. It allows you to collaborate with clients, track your billable hours, create invoices, send late payment reminders, add late fees, and more. Cloud-based with an app, this can also help when on the go.
One of the perks of Wave is that it’s free accounting software with add-ons you pay for, like payroll. It integrates with a lot of third-party apps and allows you to import transactions. It’s cloud-based and convenient, but you won’t be able to track inventory and doesn’t have some of the functionality like QuickBooks or other software. If you’re looking for a simple accounting solution, this may be the one.
Xero Accounting software keeps everything in one place on the web, allowing others to collaborate anywhere, anytime. It is customizable to meet your needs with different add-ons and other third-party apps. There is also a mobile version of the app for convenience. It’s a monthly, subscription-based software.
For creatives that just want to manage their spending and leave the rest to the accountant, Quicken is one of those programs. It works like Microsoft Money, and doesn’t have all the bells and whistles but can help trace assets and liabilities, and keep everything related to your business separate from your personal finances. It also stores business documents.
The key is getting a program that’s user-friendly and easy to understand. If you travel, you need to keep a record of the miles you use for business. That’s a deduction you may be overlooking.
Another great thing about using software is the ability to send invoices and other communications while organizing your business expenses. Some also come with timers, so you’ll know how much time you’ve spent on a project and can bill accordingly.
Having an app that works alongside the software is also handy, as you can collaborate and connect with clients while on the go.
Why is this important?
Imagine an investor who wanted to give you some money but needed to know how your business was doing. Would you have the financials to show them? As you grow, you may consider getting a bank loan. You can’t do that without a P&L. The same goes for purchasing a property. If you don’t have an accurate assessment of your financials to prove your income, you won’t get very far.
You should want to see how your business is doing year over year to determine if you need to make some adjustments. You will see the trends and patterns, what time of year sales are lowest, and when you need to have additional supplies on hand to prepare for busier seasons.
Act Like a Boss
There are a few things you should be doing on a recurring basis because bookkeeping is a good business practice you can’t go without:
• Review cash every day or every other day
• Review bank account for transactions
• Evaluating your income and expenses
• Sending out invoice
• Recording any incoming payments
• Issuing checks
• Ordering supplies
• Conducting a month-end close to determine how you did for the month.
• Following up on invoices and other transactions.
• Doing an inventory check and updates.
• Reviewing total income and expense flow.
• Filing all paperwork (just in case the IRS visits)
• Generating your monthly P&L
You may have to pay taxes on a quarterly basis, so you should be doing the following:
• Submit payroll tax
• Update all P&L’s
• Follow up on outstanding bills and invoices
• Pay sales tax due
• Pay income tax (if it applies)
• Review and update inventory
This tells you how your business is doing. Your accountant can also assist with this:
• Follow up or write off outstanding invoices
• Decide if delinquent accounts should be pursued
• Pay yearly federal and state taxes due
• Generate (or your accountant) year-end reports
• Work on the budget for the incoming year
One of the key things in being a good steward over your money as an artist, musician, or photographer is understanding how important it is to stay organized. Once you set up your systems, everything else should fall into place without too much hassle.
The Bottom Line
While you may not have time to take a quick accounting class at a school, there are a few resources that can help steer you in the right direction. Check out our guide on small business accounting courses that will help you figure out the basics as you go along. Even with an accountant, you want to make sure you understand what they are talking about, so you’ll know if things aren’t adding up.
If you think about expanding your business, you’ll have to know how much it will cost. Your accounting software can help with those projections and provide insight into the income you need to generate, and the additional expenses you may incur. Having a snapshot in front of you is much easier than trying to figure it out on the fly. You’ll be able to determine how much of a space you can afford, whether you need to get more inexpensive supplies and if the expansion is really worth it.
Accounting doesn’t seem “creative” right now, but as your business grows and you start reaping the benefits, you’ll want to know how much you’re making and where you can cut expenses to keep more of those profits. Having a sound financial plan with your books in order will help keep the stress down while setting you up for continued success. Do the work now and watch the rest fall into place.
Disclaimer: Please keep in mind that the content of this post is not intended as tax, accounting or legal advice. The information presented here is for informational and educational purposes only. Before engaging in any transaction, be sure to discuss these matters with a trained, licensed professional.