Like most people in the arts you are probably waiting to do your taxes at the last minute. You would much rather be creating art, writing a script or shooting a movie then crunching numbers and poring through old receipts. If it helps, consider it a civic duty to pay your taxes since those funds are used to cover many of the communal goods we use. But, the truth is even if you do not think it is your civic duty, you simply can not avoid them. As the Benjamin Franklin saying goes, “In this world nothing can be said to be certain, except death and taxes.” Therefore, you have to get them done. And it is worth taking the time to understand the process even if you are hiring someone else to do your taxes for you. Understanding taxes as a filmmaker (producer, director or screenwriter) can help you with your tax goals of paying what you owe (if anything) and getting a nice refund or tax write-offs.
Employee vs. Self-Employed
When it comes to taxes, you are either an employee or self-employed. You can even be both (for example, you are an A.D. for a prime time television series[employee] and are producing and directing an independent short film [self-employed]). Employees have their income reported on a W-2 form and self-employed people have their income reported on Form 1099-MISC. An employee’s expenses are then listed on Form 2106, Employee Business Expenses whereas a self-employed individual lists his or her expenses on Schedule C (From 1040). According to the IRS, if payment for services you provided is listed in box 7 of Form 1099-MISC (.pdf), , the payer is treating you as a self-employed worker, also referred to as an independent contractor. Note:
- You do not necessarily have to have a business for payments for your services to be reported on Form 1099-MISC. You may simply perform services as a non-employee.
- If the payer is treating you as a self-employed individual, then it is because the payer has determined that an employer-employee relationship does not exist in your case. However, you or the IRS might disagree.
If you were not an employee of the payer, where you report the income depends on whether your activity is a trade or business. You are in a self-employed trade or business if your primary purpose is to make a profit and your activity is regular and continuous.
- If you are in a self-employed trade or business, you must include payments for your services on Schedule C (Form 1040) (.pdf), Profit or Loss From Business (Sole Proprietorship), or Schedule C-EZ (Form 1040) (.pdf), Net Profit From Business.
- If you are self-employed, you will also need to complete Schedule SE (Form 1040) (.pdf), Self-Employment Tax, and pay self-employment tax on your net earnings from self-employment of $400 or more.
- There is no withholding of tax from self-employment income. As a self-employed individual, you may need to make estimated tax payments during the year to cover your tax liabilities.
- If you are not an employee of the payer, and you are not in a self-employed trade or business, you should report the income on line 21 of Form 1040 (.pdf), U.S. Individual Income Tax Return, and any expenses on Schedule A (Form 1040) (.pdf), Itemized Deductions.
If you believe you may be an employee of the payer, see Publication 1779 (.pdf), , for an explanation of the difference between an independent contractor and an employee. For more information on employer-employee relationships, refer to Chapter 2 of Publication 15, (Circular E), Chapter 2 of Publication 15-A, , and Tax Topic 762, .
Whether you are an employee or self-employed, you receive an income (hopefully!), and this is regardless of whether you receive a 1099 or W-2 at the end of the year or not. All types of income including barters and free products from endorsements (swag) must be reported on your 1040. Specific to a filmmaker, an income would include, but is not limited to, all payments for:
- independent contractor or employee work as an above- or below-the-line crew-member,
- teaching classes, seminars, privates and workshops,
- producing and directing,
- royalties from films and other works like books, music, photography,
- public speaking,
- guest appearances, and
- social media promotions a filmmaker is contracted to do.
The IRS defines “deductible business expenses” as expenses that are:
- incurred in connection with your trade, business, or profession
- “ordinary” and “necessary”
- “not lavish or extravagant under the circumstances”
What it means to be “lavish” or “extravagant” and “ordinary” or “necessary” are left to interpretation and can result in audits if the IRS’s spider-sense starts tingling. The following is a list of items that could fit the definition of “deductible business expenses”:
- Home Office or Studio Expenses including office supplies
- Legal and Professional Fees
- Agent Fees
- Travel & Meals (including travel via cabs, subway and buses, business meals and entertainment and stays in hotels, motels, etc.)
- Automobile & Vehicle Expenses
- Moving Expenses
- Medical Deductions
- Promotional Expenses
- Unique Expenses such as lessons & classes, videos & dvds, etc.
The specifics of how any of the above expenses can be deducted requires more space than this article will allow so I recommend discussing it with your accountant, book-keeper, lawyer, tax preparer or trusted adviser if you can deduct any items that might fall under those categories.
Record-Keeping and Evidence
People hate doing taxes not just because it can be confusing but also because it means having to go through a year’s worth of receipts and trying to find lost and scattered documents. Do yourself a favor and ORGANIZE. If you haven’t by now, start an expense diary that you fill in daily or weekly on a consistent basis. An expense diary can be a simple notebook where you note your financial activities during a year. It can look something like this:
Feb.10.14 – transportation to and from rehearsals: $7.50; meals: $12.53.
Feb. 16.14 – location scouting costs (gas and tolls): $65.00; The Hollywood Reporter subscription: $199.00.
This will help you track what you save and can be useful if the IRS audits you. Also get an accordion folder where you can store your evidence so you don’t lose them. Your “evidence” includes anything that you would use to prove to the IRS where your income comes from and that your deductions are real and necessary. According to the IRS, the following are the types of records you should keep:
- Gross receipts for the income you receive from your business such as itemized bills stamped paid, receipt books, invoices, Forms 1099-MISC, etc.
- Purchase records for items that you buy and resell to customers, such as canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transferred, as well as, cash register tape receipts, credit card receipts and statements, etc.
- Expense records for costs that you incur outside of purchases to carry on your business such as cancelled checks, account statements, cash register receipts, etc.
- Asset records for property, for example, machinery and furniture, that you own and use in your business such as proof of when and how you acquired the assets, Section 179 deductions taken, cost of any improvements, etc.
- Employment records for at least four years.
Danny Jiminian is an attorney who specializes in Entertainment Law, Intellectual Property, Business Law and Nonprofits and practices out of New York. For a free consultation, email him.
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*Image provided by taxcredits.net under a creative commons license