Most on this forum have been in business for many years, but I will start this series of articles as if you were starting from scratch. I’m sure there are newcomers here that are wondering if it is too much of a hassle to become business owner versus staying a hobbyist. This series is for you.
Unfortunately, because photography is seen as a hobby by the masses – often times many that start having paid customers continue treating it as a hobby without worrying about any legalities or industry ethics. Continuing to operate under the table for too long is a mistake that hurts the profession and how the general public views our craft.
Before heading into why you should legitimize your business for legal purposes – let’s start by discussing how it hurts fellow photographers. Operating your business by not collecting or paying state sales and use tax, as well as not reporting the extra income to the IRS hurts other photographers by driving the perceived value of the profession down. A hobbyist that charges will most likely charge a low amount for his talent because his overhead is next to nothing. Whereas an established photographer – regardless of full-time or part-time status, will have fixed overhead costs that must be factored into their pricing. While it may seem capitalistic to undercut your competition in the beginning, in the long run – the low prices that the hobbyist charges will be harder to sustain.
So when exactly do you stop being a hobbyist and start being a photographer in business? Around the time that you stop keeping your artwork to yourself and begin sharing it online; in an effort to look for opportunities to have people want your photography for themselves. You don’t even have to be getting paid yet; and yes you can still be part-time. The IRS calls a hobby a “not-for-profit activity.” They point to 8 things that show you are in business:
- Do you carry out the activity in a business like manner
- How much time and effort do you devote to the activity
- Do you have expertise in the activity
- Are the losses due to circumstances beyond your control
- Have you tried to increase the profitability of the activity by changing your methods of operation
- Do you depend on income from the activity for your livelihood
- Have you made a profit on similar activities in the past
- Does the activity involve considerable work that could not be considered “pleasurable”
One quick justification that new photographers tell themselves is that they are part-time only, so it is not a “real” business. It could not be further from the truth. Just because your office hours are unique does not mean you are not earning revenue or paying out expenses. Gross income, as defined by the IRS includes “money received from whatever source derived”. Not just what’s on your W-2.
Another reason that people do not formalize their business – in our industry or in others, is because they feel like their operation is so small they would never be caught being a cash business. This of course is not true. If you are flagged for an audit, the IRS will research your bank accounts and ask you to explain all the cash and check deposits over the course of the year.
There are immediate tax benefits to being a business owner. Only businesses can deduct losses from their income. If the IRS decides you are a hobbyist it will take away the business losses. Of course, this does not mean you can use this business as a tax shelter either. If you show a business loss year after year, this will raise suspicions with the IRS.
Let’s keep this conversation going. Comment about when you knew it was time to “be in business” and stop calling yourself a hobbyist.
Next time: The toughest first question: Sole Proprietor, LLC, or S Corp?
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Houston Wedding and Portrait photographer, Michaelle Janet has transitioned from corporate accounting to working artist and business owner. She is here to help members of PPBF with their accounting questions, but always advises to check with a trusted accounting professional in your area as laws vary in every state.
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