Getting Ready for Tax Day with Rus Garofalo of Brass Taxes
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Taxes are tough. We know this, you know this, and we’re always trying to figure out ways to help creators navigate these discussions. Our FAQ and Tax Guide provide guidance for creators and tax professionals, and our Resources Page highlights Brass Taxes as a service that has worked with creators based in the U.S. to figure out their unique tax situations.We spoke with Rus Garofalo, the owner of Brass Taxes, about how Kickstarter creators can get organized before tax season rolls around and hopefully make filing just a little bit easier.
TL;DR: be prepared for potential tax liability, and proactively track your expenses!
But do read this entire post. You never know what information could come in handy.
Hi Rus! Can you tell us a bit about what you do? How are taxes for freelancers and artists different than other taxes?
I created Brass Taxes because there wasn’t a place to get decent tax help for people with confusing taxes. We (freelancers and artists) are the annoying clients for other tax-handling services. Our returns take longer because there’s lot of gray area that needs to be talked through. That process takes time and someone that understands your industry. Most tax professionals haven’t worked as writers, musicians, or artists, and aren’t familiar with how income and expenses flow in those professions.
Our taxes are different because most people just need to enter information from a W-2 form, mortgage, student loans, and hit submit. People making untaxed money need to enter all of their expenses. You only pay taxes on what is left over after all of your expenses, not the total amount of money you made during the year. You can also deduct ‘necessary and reasonable business expenses,’ which is where things can get vague (and where tax professionals earn what you pay them).
Some of our project creators will get a 1099-k tax form in the mail. Can you tell us what a 1099-k is?
A 1099-k is just another tax form, like a W-2 or 1098-E student loan interest form. People get them from companies like eBay, Airbnb, Amazon, etc.
Editor’s Note: For more info on which creators should expect to receive a 1099-K, visit our FAQ.
You’ve done taxes for a bunch of Kickstarter creators. What’s the most important thing someone should know before they launch a project on Kickstarter?
You should be prepared to understand the tax liability of your project. Here are some quick tips:
Try to spend Kickstarter funds in the same calendar year that you receive them. U.S. taxes are done on the calendar year. The IRS looks at a business and asks “on December 31st, how much profit did this business have left over?” So, if you received a lot of money and only spent a small portion of it, it will seem like you had a lot of profit that year. But in actuality, those funds will probably go towards your project expenses in the following year.
Determine the retail value of your rewards (i.e. your DVD reward tier might be priced at $100, but the retail value is probably closer to $20). This will help you keep track of project expenses, income, and potential sales tax liability. This information will be very helpful to whoever helps you with your taxes.
What’s the most common mistake that people make?
They don’t understand that funds raised on Kickstarter are generally subject to taxes and freak out when they get a 1099-K form in the mail. :(
What is your best advice for keeping track of project expenses?
I prefer physical receipts, but any system of tracking expenses where you’ll keep all of your receipts and categorize them routinely is a decent system.
I keep a binder clip of envelopes and label each envelope with a tax expense category (supplies, travel, advertising, meals, research). Whenever I buy something, I immediately decide whether or not it’s a business expense, and if it is, I keep the receipt in my wallet. Once my wallet gets awkwardly full, I take the time to categorize the receipts. If I buy something online, I jot down a physical receipt, including what I bought, and where and when I bought it.
At the end of the year, I add up all of the expenses, and write down the total on the outside of the envelope. Figure out a system that works for you and that you know you’ll keep up to date with all of your expenses.
Do you have any hard and fast recommendations for thinking about sales tax and Kickstarter rewards?
All the sales tax rules vary from state to state. There has never been a clear ruling on how sales tax works with Kickstarter rewards, so it’s really up to your and your tax advisor to talk this out. Be prepared with an itemized list of all your rewards, the pledge value, the estimated retail value, and where everything was shipped.
Editor’s Note: Your backer report can help you export a list with your backers’ shipping addresses and reward selections.
What are your thoughts on setting up an S Corp or an LLC for a creative project?
This really varies case by case. Bottom line, setting up a company might take more time and money than it’s worth for your project. On the other hand, setting up a company helps avoid liability if you get sued, which could be important. That said, anything other than an LLC with one owner taxed as a sole proprietor will require that you complete a business tax return, which is another added expense.
An S Corp requires you to complete a business return, and have yourself on payroll, too.
We hear from a lot of creators with confused accountants who don’t know how to make sense of money collected through Kickstarter. Is there any advice you can offer for your fellow tax preparers?
There has not been a Kickstarter case taken to court by the IRS that I’m aware of, so we don’t have a clear ruling on how these funds should be handled. I try my best to explain any issues to my client, and then make it clear that the decisions that they make in terms of filing are their own. This is important because it’s the client who is liable for what’s on their return. Tax professionals should explain the situation until the client is comfortable with what’s going on.
Editor’s Note: Tax professionals should also understand that while some backers are pledging in exchange for a reward, others back just to see the project happen. In some cases, pledged funds could be considered a gift. We created a tax guide to explain how Kickstarter works. Share it with them!
Is there a right time to contact an accountant or tax professional to help you with your project? How can someone best prepare for that meeting?
Contact a tax professional when you are spending more than an hour of time worrying about this stuff. If you are keeping track of your expenses and income, and have a vague sense of what you might owe, then you are probably fine to wait until tax time. When tax time rolls around, make sure to have your expenses categorized and tracked from the previous year, and have the money to pay your taxes.
If you can’t pay your taxes all at once, there are very reasonable payment plans. Consider setting one up if you think that it’s going to take more than a few months to pay off your balance. The IRS can be scary, but if you don’t ignore them, they are pretty cool about things.
Looking for more tax resources? We’ve done some homework for you!
- Brass Taxes discusses the tax implications of using Kickstarter.
- The Freelancer’s Union Ultimate Tax Guide is nothing short of ultimate! It’ll help you with everything from reading your 1099 to finding apps that can help with keeping your expenses organized.
- Creative Capital spoke with Sandra Karas, an attorney that specializes in taxes and financial planning. Her three quick tips for artists: “Organize! Organize! Organize!” (Agreed, Sandra!)
- The New York Times shares tax tips and tools for freelancers and folks working in the gig economy.
If you’d like to continue this talk about taxes or hear how other creators approached filing, join the conversation on Campus.
Disclaimer: The information in this post is meant to be a general resource for you and your tax advisor, and isn't intended to (nor can it!) serve as a substitute for actual, individualized tax, financial, or legal advice. Every creator’s project and tax situation is different, so make sure to verify your individual circumstances with a tax professional.