While creative work is fulfilling, it often comes with financial complexity. As a writer, composer, filmmaker, or any type of creative professional, knowing your tax obligations is important. It helps with protecting your income and planning for the future. Particularly if your earnings fluctuate, proactive tax planning can help you avoid surprises and keep your finances on track.
Why tax planning for creative professionals is important
Your work may often involve irregular income streams, multiple clients, and project-based payments. Maybe you earn money from contractual payments, royalties, commissions, grants, or even merchandise sales. Each income source can have different tax implications. Without a clear strategy, you can risk underestimating your tax liability.
Are you an employee or independent contractor? How you’re set up to file taxes matters. Essentially, you may be operating as a business entity or a self-employed individual.
Tax planning isn’t just for high earners. Anyone who wants to manage their cash flow, maximize deductions, and reduce stress during tax season should have tax strategies. Even small oversights can lead to penalties or missed opportunities to save money.
Entity structures and employment agreements
Many creative professionals work through loan-out companies, typically structured as corporations. This setup can provide liability protection and tax advantages, but it requires careful planning.
- Salary vs. distributions: Deciding how much salary to pay yourself versus taking distributions can reduce self-employment tax.
- Employment agreement: A formal agreement between you and your corporation is essential for compliance and audit protection.
Pass-through entity (PTE) deduction
If you operate as an S corporation or partnership, consider the pass-through entity (PTE) deduction. This strategy allows certain state taxes to be deducted at the entity level, reducing your federal taxable income. It’s a valuable tool for lowering overall tax liability.
Retirement contributions
Retirement planning isn’t just for corporate employees. Tax-advantaged plans can reduce taxable income while saving for the future:
- SEP IRA: Ideal for freelancers with variable income.
- Solo 401(k): Allows higher contribution limits for those with strong cash flow.
- SIMPLE IRA: A good option for small businesses with employees.
Intellectual property and licensing income
If you create intellectual property — such as designs, music, or written works — understand how licensing income is taxed. Royalties and licensing fees often have unique tax treatments, and proper classification can impact deductions and reporting.
Multi-state reporting
If your work spans multiple states, sourcing income correctly is critical. States generally use two methods:
- Performance-based sourcing: Income is sourced to where the work is performed.
- Market-Based Sourcing: Income is sourced to where the customer receives the benefit of the work.
This requires careful review of contracts, invoices, and your physical presence. Misclassification can lead to double taxation or incorrect reporting of state income.
Foreign considerations
Working internationally adds another layer of complexity:
- Foreign tax credits: If you pay taxes abroad, you may qualify for credits to avoid double taxation.
- Tax residency: Spending too many days in another country can trigger residency rules and additional tax obligations.
- Deductible expenses abroad: U.S. tax law generally allows deductions for ordinary and necessary business expenses incurred overseas, provided they are properly documented and converted to U.S. dollars.
Depreciation of equipment
You may have made investments in gear like cameras, computers, or studio equipment. These assets could qualify for accelerated depreciation under Section 179 or bonus depreciation rules, allowing you to deduct more upfront and reduce taxable income.
Health insurance and HSAs
If you’re self-employed, you can deduct health insurance premiums for yourself and your family. Additionally, setting up a health savings account (HSA) can provide tax benefits while helping you cover medical expenses.
Proper recordkeeping and audit risk
Meticulous record keeping is your best defense against audits and missed deductions. Maintain:
- Receipts and invoices for all expenses
- Contracts and agreements for projects
- Logs for travel and business use of assets
Digital tools and accounting software can simplify this process and reduce risk.
Key tax considerations
Your profession carries distinct tax challenges. Here are some important areas to focus on:
1. Income reporting: From royalties and commissions to freelance fees and regular payments or lump amounts, each income type may be taxed differently. For example, royalties from book sales or music may have different rules than income from design projects.
2. Deductions: Many work-related expenses are deductible. Keeping detailed records is critical to maximize deductions such as:
- Software and equipment
- Studio or workspace rent
- Travel for client meetings or shoots
- Marketing and advertising costs
- Professional development courses
- Agent or management fees
3. Self-employment taxes: If you’re self-employed, you’re responsible for Social Security and Medicare taxes in addition to income tax. These can add up quickly, so plan ahead for quarterly estimated payments. Self-employed tax strategies can be very different from traditional job strategies.
4. Sales tax: If you sell products like prints, merchandise, or digital downloads, you may need to collect and remit sales tax. Rules vary by state, so check requirements where you do business.
5. Home office deduction for creatives: Do you work from home? If you use part of your home exclusively for work, you may qualify for a home office deduction. This can include a portion of rent or mortgage, utilities, and internet costs.
6. Travel expenses: Trips for shoots, exhibitions, or client meetings often qualify for deductions: airfare, lodging, meals, and transportation.
Managing irregular income and cash flow
You may often experience feast-or-famine cycles with your work, like lump payments followed by dry spells. This makes budgeting and tax planning even more important.
Consider taking these steps:
- Setting aside a percentage of every payment for taxes
- Using separate accounts for business and personal expenses
- Automating savings for emergency funds and retirement
Why a coordinated financial approach helps
Creative careers involve interconnected financial decisions: tax planning, budgeting, saving for retirement, and managing irregular income. Working with separate advisors can create gaps that cost you money.
A family office-style approach offers:
- Integrated services: Tax planning and preparation, investment management, and financial planning coordinated by one wealth advisor.
- Specialists: Experienced professionals who understand each unique challenge of being in a creative career and have experience with creative industry financial planning.
- Cost efficiency: Consolidated services reduce duplication as well as missed opportunities.
- Personalized planning: Strategies tailored to your personal goals and lifestyle.
Simplifying your financial life
The rewards of creative work can be quite a contrast to managing the financial side. But with proactive tax planning and a coordinated advisory team, you can focus on your craft while building long-term financial security.
It doesn’t matter if you are newly generating income from your creative endeavors or already handling many projects. Knowing your tax duties and leveraging expert guidance can help can give you stability and confidence. This article touches upon only basic tax tips and irregular income tax planning for creative professionals.
At Mercer Advisors, we can collaborate with your full team — CPAs, attorneys, agents — to help ensure a comprehensive approach to your financial plan.
Mercer Advisors also offers tax planning and preparation services to our clients as part of an integrated wealth management solution. From artist tax deductions to tax advice for designers and writers, we have experience. If you want to learn more, let’s talk.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.
Tax preparation and tax filing are a separate fee from our investment management and planning services.
