Taxes/ Accounting/Type of Business (sole trader, partnership, limited company) etc
Now, due to the fact that this book will be read by people all over the world, I am not going to go into great detail about the actual “guts” of your business, i.e. the status (company, sole trader etc), the tax situation and so on because each person has different circumstances and each country has its own set of rules and regulations.
Also, as a disclaimer, please know that I am in no way qualified, nor an expert in accountancy and tax issues so all of this advice should be taken in context. If you are unsure of any of it, please seek professional or legal advice.
We shall cover things in brief and I recommend that you get a good accountant and even speak to a lawyer/attorney before “setting sail” on your new journey and I will give advice where I can to prevent any shortcomings or problems later on.
Professional Associations and Bodies
You don’t need to be part of any professional photography associations such as the SWPP (Society of Wedding and Portrait Photographers), the RPS (Royal Photographic Society) or the MPA (Master Photographers Association) but I would still recommend joining one or two.
You don’t need any qualifications, degrees, City and Guilds or letters after your name. In fact, all you need to start your business is a whole heap of desire and determination and the only real thing you need to pay particular attention to is the tax man.
Whatever you do, however you do it, don’t p**s off the taxman.
Make sure that if you are just a hobbyist photographer, you do not declare any of your expenses against other taxable income. They will catch you out and when they do…!
If you are running a business, keep your work receipts and business receipts separate. If in doubt about what to claim and what to leave out, it may be an idea to get an accountant to do the first years returns for you. You need to be consistent in your approach and don’t raise any red flags by suddenly declaring expenses that have nothing to do with your photography business.
This is why I say to set aside a third of your earnings for the IRS (Inland Revenue Service) because most of the time, you won’t need it all and you may well end up a nice little bonus at the end of each year.
Be honest and don’t try to scam the IRS
Even if you are selling the occasional print on eBay or a few stock photos at Dreamstime, you really need to think about declaring it as a back dated tax bill and/or fine is not a nice thing to suddenly receive.
If you hate paying taxes, here is what I think about it
First and foremost, if you are paying taxes, you are making money which is a good thing! If you are not paying taxes, you are losing money unless you are being “creative” with your accounts to avoid tax. Unfortunately in this day and age, this can go against you in different ways.
If you avoid making a profit by being creative, you may forfeit your ability to get credit in the future when you may need it. If you are doing this full time, you may wish to buy a house one day and you will need some pretty impressive accounts to get a mortgage.
Let’s get hypothetical for a bit and let’s assume your town decides to do away with tax and go it alone. It wouldn’t be long before the litter starts to pile up, the roads start to get messy and damaged, the NHS (UK) would deteriorate and the police wouldn’t be around to protect you and your family.
It wouldn’t take long before a “council” is elected to deal with all of these issues and it would end up with the council requesting a fee be taken from everyone in town to cover these costs. The only fair way to do this would be to pay a percentage of everyone’s earnings and low and behold, we have a tax system again.
Just accept that it needs to be paid and if you account for it and put aside a chunk of your earnings each month, you will be just fine and not fined!
Again, it is worth talking to an accountant to establish whether you are better off starting as a sole trader or a limited company or whatever the choices are in your country. There are benefits and downsides to both but again, everyone’s situation is different so do some research.
Lastly, bear in mind that with photography, once you have all the gear, your expenses can go way down meaning higher profits and more tax to pay so keep an eye on your income and expenditure.
In the UK, the current VAT threshold is £81,000 (as at 2015). This means that if you earn, or think you will earn this amount in any given year, you must register for VAT. Even if you are just half way through the year and you think you may go over this threshold at some point, you need to declare this, register for VAT and start charging the going rate on top of your current prices.
This can be tough for personal jobs that are not “business to business”.
In Spain, things are slightly different and when I was running a business there, you have to register for IVA (VAT) as soon as you start earning even €1 (circa 2007) so find out the regulations and rules in your country and abide by them.
If your country has a threshold and you think you plan to reach or fly past that threshold, remember that you will then have to start adding VAT to all your jobs such as portraits and weddings which may:
- Make it difficult to be competitive with your competition as you have to raise your prices or
- Mean you need to add VAT back into your current prices which reduces your profit
Something you need to think about and discuss with those in the know. The good side is that you can claim back any VAT on purchases made in that year which then reduces your VAT bill and helps to make up for any shortcomings.
This is something you can do yourself and even declare and pay your taxes online.
In the UK it is called self assessment but be sure that you know what you are doing as you could well end up paying too much tax in which case you could get a tax return (if you ever realise you have overpaid) or you could pay too little and one day get hit with a nasty bill and/or fine.
I would suggest that you use the services of an accountant or bookkeeper for the first year or two until you fully understand what you are doing, and what to account for and why.
Whatever you do, you should keep a daily or weekly schedule (spreadsheet) of your income and expenses so you can keep on top of things. In a previous life when I left college, I trained as an accountant for a year or so and remember being given carrier bags full of loose receipts and invoices from the person’s financial year which took ages to sort out…not nice.
Get organised and have everything in its place, you will be glad you did when the time comes to do your annual accounts and tax returns.
It also helps you to keep track of where you stand with your finances so you know if you can afford that new lens or if you need to put the cash aside for tax.
Be prudent and a little conservative with your estimates, that way you shouldn’t get any nasty surprises. As I mentioned before, some photography businesses and online enterprises can have very few expenses once established so be aware of that and account for the possibility of more taxes being payable as you go on.
Open up a separate account to hold your projected taxes in.
Profitability and Overheads
It’s not just a case of going out, earning the money, banking it and repeating. What you want to be doing over time is reducing your overheads (in everything) and increasing your profits, simple right?
There are ways to do this but you need to think about where you want your business to be, I will use the UK as an example but you can use this model for your own country’s regulations.
If you are a sole trader in the UK, as I mentioned before, you need to keep your turnover below £81,000 if you want to avoid registering for VAT but you obviously want to increase your profits at the same time.
Note: There comes a point where you may want to expand your business and that takes some cunning planning because when you reach the VAT threshold things will change.
Let’s say you have a turnover of £60,000 and things are going well. As soon as you reach say, £81,000, you are then registered for VAT and you could well be earning less profit than when you were turning over £60,000.
This is where you need to establish where you want to be before moving ahead but we will come back to that.
So, you are staying below the threshold and earning £70,000-£80,000 per year (turnover) and want to increase your profits. If you were to increase your prices or take on more work, you are going to reach that £81,000 threshold and in comes the VAT man.
Probably the most obvious and effective way to increase profits, is to reduce your overheads.
Let’s take a wedding photographer grossing £60,000 per year as an example.
He shoots 30 weddings a year and earns £2000 from each wedding on average. For the £2000 package he offers, he gives a certain brand of Photobook which costs him £250 to make so he charges £500 within the package (after pricing the package) and makes a profit of £250 on the book.
Again, if he charges more for the book to increase his profits, he is in danger of going over the VAT threshold so what he does is look for a new supplier.
The new supplier makes a very similar book at similar quality to his current brand that most clients wouldn’t realise is different. This book costs him just £100 to make so he charges £350 and still makes his £250 profit on the book, so he can reduce his fee from £2000 to £1850 and still make the same overall profit but his turnover for the year is now £55,500.
He could of course keep his prices the same (£2000 per wedding) and make an extra £4500 per year profit (30 x £150) as his overheads are now reduced, or he can afford to shoot two more weddings and increase his profit that way.
The choice is whether he wants to decrease his price to attract more people in a “down” market and shoot 2 more weddings, or keep his price the same and just settle for the extra cash and more time to himself.
Either way, you can see how by simply changing supplier for one item, you are able to increase your profits significantly.
Now apply this to other things in your business such as stationery, print suppliers, ink, fuel bills (driving slower throughout the year and using different garages/gas stations), turning lights off in the house more often, spending less on things that really aren’t necessary, turn the heating down a few degrees, using rechargeable batteries and so on.
I even heard on the radio the other day that “downgrading” your food supplier by one notch can save over a thousand pounds a year. For example, instead of buying “Princes” branded Tuna, buy the next brand down or even the store’s own brand. More often than not they taste the same and in some cases they are the same.
Note: Don’t get me started on health ; )
We come back to the butterfly effect. All these little, seemingly worthless changes will have a huge impact on your bottom line over the space of a year…watch your spending.
Coming back to the “point of no return”, breaching the VAT threshold
If you plan to expand your business, you want to make sure that you increase your turnover significantly to greatly surpass the VAT threshold to make it worth your while. You can do this by getting the timing right for your expansion.
If you are planning to expand by, for example:
- Taking on photographers to shoot more weddings for you
- Opening a studio to capture the passing portrait trade
- Starting training courses
- Launching a new product
- Adding a new package to your weddings going for the high end market
- Writing books etc
You want to try and work it so you launch everything in a fairly short timescale and motor past the VAT threshold like it didn’t exist. Otherwise, as I mentioned before, you could end up out of pocket.
You see, if you turnover £70,000 per year, you then have to charge 20% VAT on all your products and that is hard to do with a wedding or portraits. You need to do one of two things and neither are particularly good:
- Increase your price by adding 20% to cover the VAT increase (but bear in mind you will be claiming VAT on your expenses but you want to be reducing those so this probably won’t be as much) so £2000 becomes £2400
- Or add the VAT back to your current price so the original £2000 becomes £1666.66 + VAT so your turnover reduces by nearly £300 per wedding meaning your profit reduces also because your overheads are still the same.
It all gets a little confusing but you need to have a well defined plan and keep an eye on your expenses and bottom line profit.
Of course for many people, the thought of earning these figures can seem like a lifetime away but it doesn’t take much to “take off” because if you get it right and work hard, photography can be a high paying career.
I have seen newbies and beginners pass through my courses and within a year or two they are doing extremely well so there is no reason why you cannot do the same.
For further reading, we recommend (this is a paid course): Accounting – Financial Accounting Part [2 of 2]
So let’s launch your business!
Next Page – Financing and Launching