Everyone pays taxes. Everyone. The amount you pay varies based on the kind of job you have and/or the kind of business that you own.
If you are a traditional artist then taxes come out of your paycheck and you file your taxes at the end of the year. If you paid too much through your paycheck then you will get a lovely refund check from our government.
If you are an independent artist then the company/person who hires you can deduct taxes from your paycheck or you can receive your full paycheck and pay taxes at the end of the year. For most independents, the latter is more common.
If you are an entrepreneur/entrepreneurial artist then the type of business entity that you own will determine how you pay taxes.
This means that you are your business. You open your doors and start operating (make sure that your business permits are in order first though!) You operate as normal and your company’s earnings and losses are reported on your personal tax return…done! Most companies start out this way and later become corporations.
Warning: In the eyes of the government, you, your partners, and your business are the same. If anything happens to your business (e.g., bankruptcy, lawsuit) your personal assets (houses, cars, money) can be taken from you.
Limited Liability Company (LLC)
LLCs are a combination of sole proprietorships and corporations. You claim earnings and losses of your business on your tax return just like a sole proprietorship but you have limited liability for anything that happens to your business. If your company goes into bankruptcy or you are sued then your personal assets stay safe.
You can have multiple owners of an LLC and this type of business needs to be filed with the state.
Corporations are completely separate business entities. You can file for an S corporation or a C corporation.
C corporations have what is called a double tax. This is because the company files its own tax return as a business entity and any dividends or income that is given to you by the company is then filed on your personal tax return. Double tax. The company is also completely separate from you which protects your personal assets.
S corporations are similar to LLCs in that they are a pass-through entity. This means that you claim company earnings and losses on your personal tax return.
Corporations must be filed with the state.
One of the biggest differences between LLCs and corporations is investors and ownership. Later in this lesson, you will learn more about what it means to take on investors and from there you can determine which business entity is the best for your goals.