As a creative business owner, it can be so hard to know all the different financial requirements and responsibilities that apply to you (that’s why I’ve got a free step-by-step checklist right here!). You might hear a lot about your “tax” requirements and get the two confused, but income taxes and sales taxes are two very different animals.
Today, let’s talk about income taxes. Of course those of us who study accounting will take many, many hours of tax courses. This is just going to be a very brief, very high-level introduction to the concepts of income taxes and what you need to know as an entrepreneur.
An Intro to Income Taxes for the Creative Business Owner or Blogger
The IRS requires you pay the federal government a tax on your income. This includes both your personal income and your business’ income. Many states also have a state income tax.
This information applies to you if you own and operate your own business. It doesn’t matter if you call it a “business” in your head or not. Even if you’re “just” writing a blog, even if you don’t have much revenue yet, you’re (generally) a business and you need to file taxes.
Let’s put personal income taxes aside and focus on your business federal income tax. Now, I’m going to make a big assumption that you’re operating as a sole proprietor, which means your business is not a corporation, a partnership, an LLC, or any other separate legal entity type. If you’ve never filed separate paperwork to incorporate your business (excluding your sales tax permit and your DBA license), chances are you are a sole proprietorship. It’s the default business entity if you go into business and don’t do anything else.
Your business entity matters because it determines which form you’ll use to report your taxes. As a sole proprietor, since your business isn’t a separate legal entity, you will report your business income on your personal tax return (Form 1040).
You will use a special separate set of pages, called Schedule C, to put all your business revenue and expenses on, then attach this Schedule C to your Form 1040. The final number (net income or net loss) from your business’ Schedule C will flow to your Form 1040.
This is what page 1 of the Schedule C looks like. You can read all about this form, including instructions for how to fill it out, here.
Basically, on the two pages of the Schedule C, there’s a place to enter your business info, all your sales, and all the expenses and deductions related to your business. At the bottom of Schedule C’s page 1, you will get the final number for your business’ taxable net profit or net loss, and this number then travels over to page 1 of your personal 1040.
I highly recommend taking some time to examine the Schedule C form and the instructions. The instructions are particularly helpful because they pretty much break each line item on the form down one-by-one. Taking some time to look over this info will also give you a more clear idea of the sort of business expenses that are deductible. Deductible expenses are the ones you need to make sure you are keeping track of (and proof of) all year long.
If you have net profit (meaning your business earned more money than it spent) on your Schedule C, that money will increase your taxes owed this year. If you have a net loss, it’s possible this money can decrease the amount of taxes you will owe overall.
If you think about how this data flows to your personal tax return and thus how it can affect your total taxes paid or refunded, you’ll realize that it’s very important that you carefully track and record all the expenses and deductions your business has over the year. It’s sort of a conundrum – you want your business to be profitable…but for tax purposes, the less profit you have (and the more expenses and deductions you report), the lower your tax bill.
This is why having an accurate, up-to-date bookkeeping system and recording ALL of your business expenses are very important.
Your business may also owe state income taxes. Each state that has an income tax will require you to file a form similar to the federal Schedule C.
This was just the briefest of brief intros to this topic. Remember to get your free checklist that guides you through what you need to do to cover ALL your financial bases as a creative seller here .
All information on this site is provided for general education purposes only and may not reflect changes in federal or state laws. It is not intended to be relied upon as legal, accounting, or tax advice. We strongly encourage you to always consult with a tax or accounting professional about your specific situation before taking any action. Please read our full disclaimer regarding this topic.