There is a myth out there that artists and craftspeople keep poor records for their businesses. I am not sure if it is true. The only thing that I know for a fact is that the I.R.S. will not look kindly at "creative accounting" and sloppy records. Creative artists and creative accounting don't mix. Neither do personal and business bank accounts. During two audits, the first thing that the I.R.S. "dragon lady" asked me both times is "do you mix personal and professional money." This is an I.R.S. red flag.
My experience has shown that as long as you properly organize and manage your accounts and can substantiate all expenses and income . . . the I.R.S. will accept your records and give up looking for more problems. That is exactly what you want. So be prepared and start now by improving your accounting practices.
As a real life story, the questions below come from Lora Hart* regarding her art business accounting.
"How do you handle the financial aspects of teaching? Do you deposit all monies collected into a business account?
If your teaching and art/craft business are integrated roles, each enhancing the reputation for the other, then all income and expenses can be attributed to your business and should flow into one business account.
Deposit the income for teaching and workshops into the business account.
Deduct expenses for teaching and your art/craft business from the same account.
Keep your business account separate from any personal accounts. Use your business account exclusively for all business-related income and expenses.
It may sound like a simplistic example, but it is as fundamental as having two pockets -- whereby all your business income and expenses go in and out of your left pocket, while all your personal income and expenses go in and out of your right pocket. Ultimately it is all your money -- you just need to organize the transactions accordingly.
"Do you deposit money from sales of goods and sales of materials/supplies into the business account and workshop fees directly into your personal account?"
The key concept is to clearly identify whether a transaction (income or expense) is business-related or personal -- and then use the correct account accordingly. It is really that simple.
Do not use your personal account for any business or teaching activities. Deposit workshop fees directly into your business account. It is most convenient to use a separate credit card for all business and teaching expenses and pay for the monthly invoice from your business account.
"I teach way more than I sell, and this is my only income. I started out putting all workshop fees into my personal account, but then sometimes had to advance money to the business account to buy supplies for students. I'd like to really figure out the best way to handle it all this year."
As mentioned before, if teaching is related to your business, then the teaching income and workshop fees should be deposited into your business account. And only business expenses related to teaching or workshop supplies should be paid for from the business account. Just keep all business-related transactions flowing through the business account.
The owner of the business account (i.e. You) can transfer money into or out of the business account from or into your personal account as needed. It is like paying yourself. Just keep personal expenses flowing separately and exclusively through your personal accounts.
I actually keep my business checking and business savings at a separate bank from my personal checking and personal savings. It is less likely to mix them up.
The I.R.S. has pages of recommendations for sole proprietorships that are very informative.
Is there a specific percentage that one would give themselves and percentage that stays with the business? I assume that I shouldn't just take money from the business account because I need a car tune up and don't have that in my personal budget (Have never done this - just an example)."
It is not necessary to split funds by some algorithm. It is very important to clearly identify whether a transaction is business-related or personal -- and only use the appropriate account for that particular transaction. But you can transfer funds between your business account and your personal account as needed.
"Should I figure out an hourly wage and just pay myself that? Is all of my teaching income - personal income or should some go to the business?"
There is no absolute answer to this question, but there are plenty of precedents to consider teaching income as related to your art business and that you should deposit your teaching income into your business account. When necessary, you can transfer funds from your business account to your personal account. I'd recommend keeping enough money in your business account to cover business expenses during an expensive month (as I can't stand the anxiety of worrying if I have enough money to cover my next automatic credit card bill).
Start by keeping track of your business-related transactions. Track your teaching income and workshop income as business-related revenue on one page. On a separate page, track your teaching expenses and workshop expenses. I keep separate pages for these items because it is easier to get totals and look for mistakes.
"Do I write myself a check to cover personal expenses?"
No, at least not directly. I hope that it is very clear that you should never, never use your business account to cover personal expenses. You can transfer funds from the business account into your personal account and then use your personal account to cover personal expenses.
The recognition and clear separation of what is business related and what is personal are essential to survive an IRS audit and require a certain mindset to diligently keep organized.
For example, if you are driving to a show, then car expenses (per mileage allowance as outlined by the I.R.S.) plus parking fees could be deducted as a business expense.
In other situations, car expenses (per mileage allowance) could be deducted if your teaching job is paid as an independent outside contractor, but not if you are an employee.
Thank You to Lora Hart for these questions. View Lora Hart's work on her Instagram account.
RELATED POSTS on ASK Harriete:
More posts about Business Accounting and Tax Information on ASK Harriete
This post was updated on December 13th, 2021.