Back-to-Business: A Taxing Situation III - Mailbox

The Back-To-Business Series: Index

Hey there folks

I actually got quite a bit of mail related to my last post in the Back-to-Business series. Some people were surprised when I suggested setting up a separate account for their acting income, and had a lot of questions about how to go about doing so, like...

... what you say makes sense, and I think I'll go ahead and set up a new account. I haven't made any money acting yet, though - won't my bank need me to put some money IN the account when I set it up? JL (Philadelphia, PA)

... what I want to know is what's the best bank to set up an acting account at? AS (Saint Paul, MN)

...When it comes to using money I have earned from my day job to pay for say a class or head shots, would it be best to take the money out of my personal account and deposit it into my business account in order to track the expenses and then note the deposit was not a payment for services or just pull from my personal account? LH (Portland, OR)

They probably will, JL. Depending on your Bank's policies, they might want as little as $5.00 or as much as $100.00 to start a new account. That doesn't mean that you have to make $5 or $100 as an actor before you set up your business account, though.

LH's question touches on this fact - businesses get venture capital all the time to help them start up; there's no reason why YOU can't invest in your business, just as a venture capital firm would, to help pay for your start-up costs. Just "loan" yourself the money you need to open the account - but record it in your records as a loan, not as income.

We're going to get a little more into basic accounting in a future post, but think of it like this - you as an individual are loaning your business a certain amount, with the understanding that your business will pay back you - the individual - in the future. Make a commitment to yourself (as a start-up business would commit to its investors) to pay that loan back within a year - heck, you can even commit to paying the loan back with some sort of interest. Setting things up with this in mind starts you down the path of thinking about your acting business as a business - It's makes your career about more than just going "finding a job." It focuses you on building a profit that you can return to your biggest investor - yourself.

As to the "best bank" to set your business account up at, AS... I can't really make that judgement for you. You have to look at the types of fees the banks in your area charge, whether they have a minimum balance requirement (more on that in a second), whether they offer checks and a Visa or Mastercard debit card (essential for paying your business expenses!), location, hours of operation... etc etc etc.

I myself prefer to keep the money I make in my community, instead of giving it to a large private bank... we've seen what some of the large private banks have done with our money in recent years. With that in mind, I've opted to keep my business account at a local credit union here in Portland. That's me, though... you'll need to figure out which bank is right for your needs.

...It sounds good in theory, but I don't make enough from acting to keep the money in a separate account. I have to pay my family's bills and that takes every dollar I get. BJ (Oakland, CA)

I see your point, BJ. Hell, more than that, I know exactly where you're coming from - there are some months where my business account has around $23.00 in it because I've taken "draws" out to pay my family's bills (again, "draw" is an accounting term... we'll get into that in a future post). We run into unplanned expenses from time-to-time, and the money has to come from somewhere. Luckily, the money's there - and it's ours to use.

Don't think of your business account as a "lock box" that you can't touch (remember Al Gore and the "Lock Box?" Still comedy gold...) If you're a Sole Proprietor, then you don't have to keep every dollar you make "locked up" for your business. You're not paying anyone's pension (unless you hire employees... but that's another subject entirely). As far as the IRS is concerned, your Schedule C income is yours to do with as you will.

This actually touches on another question I received:

... so if I put all the money I get from acting into a business account, how do I get it? Do I write myself a check for a salary? KD (Albuquerque, NM)

Yes and no. This is one of those accounting things we're going to get into later on... but as I said above, the IRS considers your 1099 income your money, to do with what you will. That means that you can write yourself a check (or transfer funds electronically through online banking) any time you like. It's not salary per-se, though... salary is an expense that businesses pay to employees. Since you're not an employee of your acting business - you're the OWNER of the business - you don't get a salary. You get paid as a "draw" on your business's "equity..." which isn't recorded as an expense for tax purposes.

As I keep saying, though, concepts like "draws" and "equity" are topics for a future post. For now, we're going to focus on tracking your income and expenses for tax purposes - and next week we'll focus on some tools for helping you do that throughout the year so tax season won't be so taxing. Keep your questions coming - email them to me, or feel free to shoot me a message on Twitter. Til then...

Let's get to work!

-Harold

Back-to-Business: A Taxing Situation III - Bank Run

The Back-to-Business Series: Index

So, my last post left you with a little tease... I mentioned a way for you to get all your business income and expenses for the year tabulated on a sheet of paper, and sent to you in the mail (or electronically) every month. Of course you probably already have something like that sheet of paper... it's called a bank statement. Now, the bank statement you receive is most likely for your personal bank account - it's not going to help you separate out your business expenses, though -unless you set up a separate bank account for your acting business.

Now, a lot of my new business coaching clients freeze up when I suggest they open a separate business account... it sounds complicated; it sounds like a lot of work; it sounds expensive! Before you start to hyperventilate over the idea, think about it - does the CEO of Target pay his company's business expenses out of the same account he pays his family's grocery bill with? That'd just be silly - and improper... the IRS frowns on people dipping into company funds to pay for private expenses! I think they have a word for that... starts with the letter E...

Lets go at it from a different angle - does a plumber buy his supplies out of the same account s/he pays the rent with? S/he could... but there are a lot of costs associated with running his/her business - does s/he really want to come up short on the rent next month because s/he had to buy a few too many flapper-valves? Sounds like risky business... and not the kind with Tom Cruise and Rebecca De Mornay. S/he keeps the business funds separate from his/her personal funds - and s/he "pays him/herself" periodically out of the business funds to cover personal expenses.

Remember what I said last week about 1099 income and "Schedule C's" - if you're reporting to the IRS on a Schedule C, they think of you as a business. That means you have to behave like a business - just like the CEO of Target or our hypothetical plumber. Otherwise, our friends at the IRS might not accept your income as business income. They might decide that its "hobby" income instead... and like I said a while back, a model train collector can't write off his/ her tracks.

Besides, it's not really all that complicated... most banks or credit unions will let you open a second checking account for little or no money. Your business account doesn't necessarily have to be what your bank calls a "business account" - an account which often has extra fees associated with it. If you're running a Schedule C business (as opposed to a corporation or LLC), all you need is a separate checking account to put your 1099 income into, and to pay your 1099 expenses out of.

Paying your acting expenses out of your business account has an added advantage - aside from seeing all your business income and tax deductible expenses laid out every month on your bank statement. It gives you a fund to save up for those business expenses. How many times have you heard an actor say that s/he needs new head shots, but doesn't have the money for them? If you put all your acting income into a separate account, and leave a portion of that income in the account after taking a "draw" for you personal expenses (that's an accounting term that I'll go into in more detail later)... then you'll build up the money needed to get those new head shots. Or that new PDA. Or to pay for that demo reel. Or... you get the picture.

But wait a minute... What about W-2 income and expenses? Remember the difference between 1099 (or Schedule C) income and W-2 income... 1099 is "self-employment income", and W-2 is "Wage" income. If you get paid as a W-2 employee, you can still take expenses related to your career off on your taxes (the rules for this are a lot more restrictive, though - consult a tax professional in your area about this). The income you receive, however, is categorized by the IRS as the same type of income you might get from a restaurant, or as a temp - it's not "business" income in the IRS's view. They expect that pay check to go right into your personal checking account.

A lot of actors still want to get a statement of their acting expenses every month, though - even if they're primarily paid W-2 income. They use a credit card for this purpose - they simply charge all their acting expenses to the credit card, and they pay the card from their personal account. Depending on the way your taxes are structured, you might even be able to deduct the fees and interest on that credit card - but again, these rules are very restrictive, and you should really check with a licensed tax professional on the details.

I myself am not the biggest fan of credit (and by extension, debt) - I've seen too many people get in over their heads by thinking they can charge something now and pay for it later... and later... and later... all the while getting buried in interest fees. If you decide to go this route, be sure that you've got the money to pay off your credit card balance at the end of the month. Don't get dragged down paying off debt you've accrued, when you could be putting that money towards saving up for the tools you need to do the job - and the tools that make doing the job easier.

Here's the thing, though - how are you going to know whether you have enough money to pay off that credit card balance at the end of the month? We'll go into some tools to help you keep track of your money - both W-2 and 1099 - in next weeks post... and these tools will make next year's taxes even easier! I'll see you then - remember, you can always email me your questions, or pose them to me on Twitter. I answer reader questions each Wednesday (or, some times, I write a whole new post around them!) For now...

Lets get to work!

-Harold