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Chapter: Is Selling Your Art a Business or Hobby?
Once you start selling your work, you have officially entered the realm of earned income. It would be wise give some advance thought to this subject. Do you want to start a business with your sales, or do you wish to keep your art sales as a hobby endeavor?
Both hobby sales and business sales are considered earned income by the Internal Revenue Service. Earned income will need to be reported on your tax returns. This is when the business or hobby distinction becomes important. Generally speaking, if you sell art as a hobby, you may only deduct related expenses up to the amount of income you receive on hobby sales. If you opt for a business structure, you will have more latitude on how tax issues are handled (deductions, depreciation schedules, etc.)
You can start with a hobby and later upgrade to a business structure of course. However, if your ultimate desire is to be in the business of selling art, your focus and intentions (and thereby your likely results) will be more clear if you choose that path up front.
If you decide to that starting an actual business is for you, it would be a good idea to start off right. That means a nice chat with a quality CPA. He or she will likely suggest that you keep separate records for all business-related transactions. This includes a separate checking account for the business. Your CPA will be the best source of business/tax advice, though I will mention a few main topics to consider here:
There are a number of ways to set up your business structure. Probably the most common business structure for artists is the Sole Proprietorship. This is the simplest means of moving forward for the business. As a Sole Proprietor, you are the business. Another common and fairly simple business structure is the LLC or Limited Liability Company. These are not terribly complicated to set up. In most states you can do it yourself. An LLC gives you the liability protection of a corporation with the simplified tax return requirements of a Sole Proprietorship. Corporations are much more complicated and expensive to setup and manage. Most emerging artists do not choose to incorporate due to the time and financial considerations involved.
Do you want outside studio space, or do you want to work out of your home? Renting studio space can be very exciting, as it creates a dedicated creative atmosphere and can be very helpful in separating one’s personal life from one’s work. Landlords and rental agreements vary greatly, so make sure to read all of the fine print before signing. Also, advise your future landlord of any unusual aspects about your creation process–sounds, smells, etc. Any disturbance of other tenants can be grounds for eviction, and honest communication with the landlord is priority one.
If you plan to work out of your home, as many artists do, think about setting up a separate space that will be entirely devoted to your work. Not only is this helpful at tax time (you can’t take a home office deduction unless the space is used only for business), it also gives you a sacred creating space. Most creative people find that their work flows more freely when they have personal and other considerations locked out for a while. You might want to consider a separate phone line for your business. This is not a large expense, and it can help you project a professional image to your clientele.
In most locations, you will be required to have a vendor’s license in order to make sales. This involves collecting sales tax on in-state sales, and then filing a sales tax return monthly or biannually. Contact your county auditor’s office for an application. If you are planning to do art festivals and travel to other cities or states, check with the show officials about the vendor license requirements. A short term permit or license for the duration of the show will likely be required. Many shows now require proof of a vendor’s license before you will be permitted to exhibit.
While the process may sound a bit intimidating at first, sales tax returns and vendor’s license applications are generally easy tasks. Just make sure you have some system set up to track your sales. This will also make your life easier at tax time. Your system can be as simple as keeping paper copies of all sales receipts. Though an accounting program like Quickbooks, or at least an electronic spreadsheet, will make your life easier going forward.
Some local municipalities require that businesses, including in-home businesses, obtain a permit. If you reside in a condominium or belong to a home-owners association and plan to work out of your home, check the bylaws and/or CC&Rs for business restrictions. While a few art sales will fly under most radar screens, you will draw attention if you start receiving large supply orders or have customers coming to your place of residence.
Pave your path for success early by thinking about the forms of payment you would like to accept. Cash is easy, though few customers pay with it these days. You can also easily accept personal checks. (It is a good idea to check ID’s when accepting checks.) The current king of payment, however, is plastic.
If you wish to accept credit cards as payment, you will need a merchant account. Merchant processors are the businesses that process the credit card transactions and then deposit the funds into your bank account. There are many companies advertising merchant processing services. Use caution in making your selection. Many of these companies advertise low startup costs, but charge high monthly fees and per transaction fees. Some of the newer services offer cellular transactions via smart phone applications. My Resource section at the end of the book offers a few leads in this area.
One good place to start when looking for a merchant processor is an arts/crafts guild or artist association. Look into local, state and national groups that specialize in artist memberships. Often the association membership fee is low, and the group offers its members access to discounts on merchant processing, among other benefits. Check with your local chamber of commerce as well. Chamber membership may also yield other perks like access to lower cost health insurance and local supplier discounts. Most banks also offer merchant processing, though the fees at banks tend to be higher than average and account requirements are a bit more rigid.
Once you have a merchant account, there are several ways to actually process a transaction. Some processors still require that you have a key terminal in your place of business. These are the same card swipe devices that you see in retail stores. You will have to either buy or lease this equipment. A newer option is the virtual terminal. It functions much like it sounds–your credit card sales are entered online through a secure web portal or gateway. The customer’s receipt can then be printed from your desktop printer. And as previously mentioned, Smart Phone transactions are becoming more and more common.
In addition to credit cards, there are other online options for accepting payment. One of the most popular is PayPal. This service allows you to accept payment from one PayPal account to another. It also allows you to accept a credit card payment without the hassle of setting up a merchant processor account. Just a few years ago a customer would also have to have a PayPal account in order to initiate and send the payment. Fortunately, this is no longer the case. Anyone can pay money to your PayPal account using a credit card, even if they don’t have a PayPal account themselves. This makes PayPal a great solution for individuals and small businesses selling products or services on the web. The PayPal form of accepting payment is widely used and is extremely popular for internet transactions such as website purchases and online auctions.
One last note - when selecting a merchant processor, make sure to look into all fees. There are many fees that can be associated with these accounts, and you should know what they are up front. A few potential charges to ask about are: monthly fees, transaction fees, statement fees, minimum monthly transaction fees, batch fees, chargeback fees, and fees for payments received from foreign and/or business credit cards. You also want to ask about the amount of time between submitting a transaction and the actual deposit of funds to your bank account. This is typically 24-72 hours. As for PayPal, standard personal and business PayPal accounts have no monthly fees, which is a big perk. The per-transaction fee on PayPal payments is a bit higher than most traditional merchant processors, though many artists prefer the simplicity of per-transaction fees and no other monthly fees.