Tax obligations and reliefs for SELF-EMPLOYED models
UPDATED: 5TH MAY 2020
The commitments and considerations of a self-employed model in the US is wide-ranging. This article breaks down the different tax obligations models must be aware of, and the reliefs that can be claimed to avoid overpaying tax.
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Overview
Freelancing certainly has its benefits, from being able to chose the hours you work to where you work. However, as a model, when it comes to accountancy and tax things can be much more complex. Under US tax law, freelancers are considered to be self-employed and therefore if you earn income you must declare your income to the IRS every year. While there are many unique deductions available to self-employed models, there are also additional taxes in the form of self-employment tax.
When assessing your tax liabilities as a self-employed model you must first gather all sources of your income. For models, sources of income can be much higher due to the many different companies you may work with. For self-employed jobs you should receive a 1099-Misc form from each of your clients.
what is a 1099-Misc Form?
The IRS requires any person or company that makes certain types of payments to report them on a 1099-MISC to the recipient and to the IRS. This form acts as an information base to cover payments like rent, royalties, prizes and awards. The most common use of the 1099-Misc form is to report your earnings as a self-employed professional. ax.
The 1099-MISC services a similar purpose to a self-employment model as a W-2 does to an employee.
SELF-EMPLOYMENT TAX FOR MODELS
In addition to the regular income subject to all tax payers, self-employed models are required to pay self-employment tax. Self-employment tax is a combination of Social Security and Medicare taxes. The Schedule SE (Form 1040 or 1040-SR) can be used to calculate how much self-employment tax you should be paying.
For 2019, the self-employment tax rate is 15.3% and consists of 2 parts:
12.4% for social security
2.9% for Medicare
For the 2019 tax year, the first $132,900 of your combined wages, tips, and net earnings is subject to any combination of the Social Security part of self-employment tax, Social Security tax, or railroad retirement tax. The amount has been increased to $137,700 for 2020. All your combined wages, tips, and net earnings in the current year are subject to any combination of the 2.9% Medicare part of Self-Employment tax, Social Security tax, or railroad retirement ) tax.
An additional Medicare tax rate of 0.9 % applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after Dec. 31, 2012.
If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year.
Do you have to pay self-employment tax?
Your income may be subject to self-employment tax if your net earnings exceeded $400.
HOW TO PAY SELF-EMPLOYMENT TAX
In order to pay self-employment tax you must have a Social Security Number (SSN) or an individual taxpayer identification number (ITIN)
Reducing your tax liability
When we prepare our clients returns our ultimate goal is to reduce tax liability to its lowest allowable amount. Our team of expert accountant for models are experienced and trained in decreasing the tax liability of self-employed models.
The IRS deems business related expenses that are ‘ordinary and necessary’ as claimable against tax.
What is included within deductible expenses?
There is an expansive range of expenses that can be deducted on your tax return depending on the nature of your work. As accountants that are primarily focused on creative industry professionals’ taxes, we are expert in identifying the expenses for actors, models, photographers, designers, web developers and so on. For example, models can be entitled to many cosmetic expenses, whereas jobs that do not typically require the same cosmetic maintenance would not be allowed this.
It is important to know the following types of expenses:
The expenses used to figure the cost of goods sold
Capital expenses
Personal Expenses
COST OF GOODS SOLD
For companies who manufacture products or purchase product for resale, you generally much value inventory at the beginning and end of each tax year to determine your cost of goods sold. Some of your expenses may be included in figuring the cost of goods sold. The cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense.
The following are types of expenses that go into figuring the cost of goods sold.
The cost of products or raw materials, including freight
Storage
Direct labor costs (including contributions to pensions or annuity plans) for workers who produce the products
Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities unless you are a small business taxpayer. Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs.
CAPITAL EXPENSES
Some expenses must be capitalized rather than deducted. This is in the circumstances where a part of the purpose of the expense acts as an investment in your business. Capital expenses are considered assets in your business. In general, there are three types of costs you capitalize:
1. Business Start-up costs
2. Business assets
3. Improvements
PERSONAL VERSUS BUSINESS EXPENSES
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.
It is very common for self employed models to have part-personal, part-business expenses. For instance, a gym membership that is used to get into the right shape to get a job, but also personally used for the health benefits.
Below are some Working examples of expenses a self-employed model might claim
CLOTHING
Clothing can be an extremely useful expense to claim on your tax return. As a.model you almost definitely spend some of your income on work-related clothing, whether it be clothing for head shots, shoots or meetings.
Clothing is definitely one of the more obvious expenses to claim. However for a smooth and painless tax-filing season every year, it is vital that you are aware of your entitlements when claiming this expense. Many models are subject to penalties and hold-backs due to over claiming.
USE OF HOME AS AN OFFICE
Use of home as an office is an expense that all too often missed out by models. If you use your home to apply for shoots, go over documents or any other work-related uses you are entitled to claim this expense.
You are able to claim a percentage of your household bills for your use of home as an office.
ADVERTISING
Getting your name seen and heard is a major part of being a successful model. Anyways you promote yourself in an effort to get ahead in your modelling career is claimable. Whether you pay to be mentioned in an article or directory, run an ad campaign on your fashion blog or any other forms of promotion- it's claimable.
MAKE UP
Make up and hairdressing are also allowable, but there has to be a clear link to the business purpose, like auditions or rehearsals, in order for this to be allowable.
COSMETIC SURGERY
For cosmetic surgery to be allowable, it will need to be directly related to your profession. You will only incur the surgery because it is necessary to your profession. There has to be a reason behind it, e.g. Teeth straightened due to the close ups.
MODELLING EXPENSES TAX DEDUCTIBLE
Models have unique tax deductions and tax expenses, many travel and personal appearance modelling expenses are tax deductible.