Should You Incorporate Your Business?

(What follows is a guest post by Illustrator and EFII community member Mark Fullerton of PixelBoy Studio.  Artwork © Mark Fullerton)

Paperwork is that dreadful component within the illustration process.

Estimates, invoices and then there’s taxes. All my moaning, groaning and procrastinating has never made it go away!

One possibility that may make it more palatable is incorporating. At one time, I believed that being one person didn’t constitute becoming a business. But illustrators are professionals providing a service! It is a business. If your income is just enough to survive on, then you should consider staying as an independent contractor. The overall yearly costs would not be financially worthwhile. If your income has increased substantially, it may mean you’re able to make more tax savings than you would if you were self-employed.

Sole Proprietorships

Most artists operate as independent contractors (self-employed/sole proprietorship). It’s much simpler to manage and less expensive than incorporating. As a contractor, you’re responsible for paying income and Social Security taxes and you need to file your quarterly estimated returns. But consider the grim self-employment tax…uggh! In the United States you must pay self-employment tax if your net earnings were $500 or more. It’s around 15.3% of your net earnings (12.4% for Social Security & 2.9% for Medicare). BUT you can deduct 50% of your self-employment tax before applying it. Self-employment tax is a big chunk of your earnings. This tax alone can put an unprepared, beginning artist in debt! Obviously, saving and preparing for this tax is essential. But if you incorporate, this tax is no longer a part of your life.

Only once, throughout my fifteen years of freelancing in multiple ad agencies, did I run into a freelancer who was incorporated. I was more than curious and asked him, ”Why? What good will it do me to go Inc?”  We jumped into deep discussion on the subject and my “freelancer” friend pleaded with me to look into incorporating. So, I researched my options. Now, I could only wish that someone had given me this information earlier! Not only do you have to be a great artist and fight all the competition to be noticed, but an artist needs to be financially savvy to survive in this world’s economy.

Corporations

Becoming incorporated is not tremendously time consuming. You hire a lawyer to draw-up the forms and keep your records updated. There’s a small yearly fee to do business within the state. Our studio cost for ALL the yearly fees averages to about $500-$600. There are several tax advantages when it comes to incorporating and several options to consider as to which structure to use for your company. Our accountant advised us to incorporate as an S-Corporation. An S Corporation is not taxed on its earnings as a corporation, but instead its earnings are passed to its shareholders (owner/you) for tax purposes. An S Corporation has a limited number of shareholders and certain taxation that can often be avoided. Also, there is limited liability protection–protecting your hard earned assets from any lawsuits.

Tax Deductions

Whether you’re self-employed or incorporated, if you are serious about saving money, then you’ll always be looking for deductions. But who wants to think about taxes all year round!? Believe it or not, organizing deductions can become an effortless habit

The categories to deduct are:

• Home office sq. footage
• Meals while doing business
• Business gifts for clients
• Automobile/taxis
• Travel for business (conventions)
• Advertising
• Education (conventions, seminars, museums)
• Supplies
• Office equipment/furniture
• Hardware/software
• Utilities
• Insurance
• Postage
• Subscriptions
• Books
• Legal fees
• Accountants
• Repairs
• Services/other freelancers

If you have to replace a light bulb in your office–you can deduct it! Anything that goes into your office/studio is fair game. As an artist, you can deduct anything that furthers you as an artist for your business. If the deduction is unclear, then be sure to write a brief reason/purpose of the deduction on your receipt.

Should You Hire an Accountant?

I’m more than capable of doing my own taxes (most of us are). But when it comes to getting taxes finished correctly, completed on time and minimizing my tax bill–I’ll spend the money on an accountant. I can’t stress this enough. And I’m not talking about using one of those frequently advertised tax service companies!! There are good and bad accountants…so get a recommendation from someone that already runs a small business. Become friends with your accountant. He or she will be helping your business grow to it’s fullest potential. To put it in perspective…if I spend $800 on an accountant but he or she saves me $2000 on my taxes and this is money that I never would have received doing it on my own. It becomes worthwhile. Do what you do best–illustrate–and then delegate what you can.

Towards the end of the year our accountant will analyze our yearly income. We’ll estimate next years advertising budget. We do a quick evaluation and this gives us an idea of what’s coming up and if more money should go into our 401Ks.

Also, as a small business owner, setting up a 401k can be inexpensive and worthwhile. Cosco (yes, Cosco the wholesaler) has a decent plan with low set-up fees. Or check other financial institutions. If you’re self-employed, then you will need to learn about tax-deductible vehicles such as Keogh plans and simplified employee pension plans.

A Quick Story

I have a good friend who is a successful freelance software engineer–genius level– and for many years we both complained about our tax bills. I eventually incorporated, got a good accountant and, now, I don’t write big checks to Uncle Sam anymore. Even though my friend is the smartest guy I know, he won’t delegate his taxes to an accountant or at the least incorporate. He pays the price every year.

My Advice

Even as a beginning illustrator, look into incorporating and see if it makes sense for you. Ask a small business owner to be your adviser. Make a conscience effort to be constantly deducting (be truthful); get an accountant; keep your receipts and use accounting software.

Obviously, keep keep in mind that I’m not a professional tax advisor or attorney…I’m just a guy who doesn’t procrastinate anymore.

Further resources on this subject:

Books

• Tax Deductions A to Z for Freelance and Contract Workers
• Tax Decuctions A to Z for Writers, Artists, and Performers

Website

• http://usaselfemployed.com

About PixelBoy Studio: We’re two brothers schooled in design at Illinois State University. Destined to work together, we both migrated to Chicago and worked numerous art jobs before freelancing as art directors/production artists in promotional advertising. Eventually, the experience we received during our years in advertising empowered us to jump-start our dream job…illustration. We started PixelBoy Studio five years ago with a passion to create 2D and 3D cartoon illustration. Since then, we’ve been working hard and pushing pixels for advertising agencies, national magazines and major publishing companies.

Some of our happy clients are: Fisher-Price, Ogilvy & Mather, Highlights Magazine, Sports Illustrated Kids, Houghton Mifflin Publishing, Running Press Publishing–and many more!

Our blog— http://pixelboystudio.blogspot.com is full of creative business posts that may be helpful for beginning artists. For  portfolio images and/or business inquiries, please check out http://www.pixelboystudio.com!

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• Book Review – Pricing and Ethical Guidelines
• Book Review – Artist’s and Graphic Designer’s Market

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