Tips From a CPA: Nine Critical Items to Consider Before Starting Your Photography Business

Tips From a CPA: Nine Critical Items to Consider Before Starting Your Photography Business

Do you love photography and hate numbers? Are you afraid you don’t know what you don’t know when it comes to starting a business? Here are nine critical items to consider before starting your photography business.

I picked up a camera for the first time and never looked back. I wanted to learn everything I could about it and quickly realized I wanted to turn it into a full-time business. I'm also a CPA. Even though I had a lot of passion for photography, I knew it was a business and needed to be treated like a business if I wanted to find success. There were numerous factors that needed to be considered before I launched. Did I do all of these things? Umm, no. However, I thought about these questions and made conscious choices about them.

Before we get started, please understand that these are general guidelines. I am a CPA, but this does not constitute, nor is it a substitute for, professional advice. If you have questions, please contact a professional that can evaluate your overall personal and business situation.

Photography Accounting, Photography Business, Tax, Accounting, Xero

Prior to starting your photography business, please consider this list of nine essential items. Have you thought of all of them already, some of them, none of them? Whatever your answer, I want to reassure you that it’s okay. You can be successful, you can get all of your questions answered, and you can have someone in your corner to help you if you don’t know what you don’t know. And if you’ve already started your business and missed one or more of these, please don’t panic. You can probably fix whatever you missed!

1. Your Photography Business Name

Do you have a great name in mind for your photography business? How do you know if you can use it? Here are a few places to check:

Domain

Check to see if the domain name you want is available. This can be done with any domain provider (e.g., GoDaddy, Wordpress, Squarespace). After you purchase your name, build your website, and start seeing your photography business rise in the search engine rankings, please make sure you keep your domain active. I have a friend who, after many years in business, accidentally let her domain (which was her name) lapse. She was high up in the search engine rankings. Someone else bought the domain and tried to sell it back to her for $8,000. I didn’t know there were people out there doing this, but apparently, there are. She had to get a new domain name and restart the search engine process, losing years of built-up search engine rankings. I am so grateful she told me this story, so I can avoid the same mistake and help others do the same.

Trademark

This is important. Please check to make sure someone else hasn’t already trademarked your desired name. This could get you in trouble if you start using a business name that has a trademark on it. Even if you're using your first and last name, like Kim Crouch Photography, there could be someone else with the same name already using that name. Once you decide on a photography business name, please consider obtaining a trademark on it. Here's a link to search the database, and you can find information on securing a trademark as well: Trademark Search.

Separate Entity

Are you planning to set up a separate entity, such as an LLC or corporation, for your photography business? This is another area where you should check availability of your business name. Check your state's (or the state where you are forming the entity) Secretary of State website. You should be able to do a name search and even reserve the name.

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2. Should You Form a Separate Entity for Your Photography Business?

It depends! You can do nothing and operate as a sole proprietor or informal partnership, or you can form a separate legal entity, such as an LLC, corporation, S corporation, or partnership. Something I always suggest is keeping things as simple as possible. The most simple option is to operate as a sole proprietor or informal partnership. This is the default and means you don't have to set up a separate entity. However, before making this decision, you should understand the implications. Aside from simplicity, there are at least two things to consider:

The Legal Side

First, I am not an attorney and am not licensed to give legal advice. If you have legal questions, please consult with an attorney to get legal advice specific to your situation. Based on my general knowledge, forming a separate legal entity may provide you with legal protection above that of a sole proprietorship or general partnership. The entity should be maintained as separate from you. On the accounting side, you can help do this by creating a separate bank account and keeping your personal expenses out of that account.

The Tax Side

There may be tax benefits associated with the different types of entities. Those benefits depend on your overall tax situation. Said another way, your ideal entity may be different than my ideal entity. Each person’s overall situation should be evaluated to make that choice. For example, there may be instances where an S Corporation may save you money in taxes, and instances where it may cost you more. 

An LLC's default taxation is that of a sole proprietorship (for a single member LLC) or partnership (if there is more than one member), or you can elect to be taxed as a C Corporation or S Corporation.

As a sole proprietorship or partnership, all of the taxable income from your business flows through to your personal tax return, and you pay self-employment and income taxes on all the earnings, whether you take them out of the business or not. A sole proprietorship is filed on Schedule C on your personal Form 1040. A partnership (unless it's a husband and wife who have made an election to be treated as a Qualified Joint Venture) should be filed on a separate Form 1065.

An S Corporation is filed separately on Form 1120S, but the S Corp does not pay income tax. All of the taxable income from an S Corp is reported on your personal tax return and you pay income tax on that (again, whether you take money out of the business or not). Employment taxes are paid only on the wages the business pays you (and there are rules about how much those wages should be).

A C Corporation is filed on a separate Form 1120 and pays income tax separately from you. Have you heard about double taxation? That applies to the C Corp. The entity pays income tax, and you pay tax on any money you take out of the entity in the form of dividends and/or wages. 

As you can see, the best option depends on your overall personal situation.

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3. Do You Need Insurance?

Yes! Please consider:

  • Insurance on your equipment.
  • General liability insurance.
  • If you have employees, you may need workers compensation and unemployment insurance. These two may vary from state to state.
  • If you have a studio in your home, review your homeowners' insurance or renter's policy and make sure you are covered for the business use. If you have a studio and/or office separate from your home, I recommend considering insurance on that.
  • If you’re driving for your photography business, please consider commercial automobile insurance on your car.
  • Disability and life insurance: This isn’t specific to your photography business, but if you can't work, how will you provide for yourself and your family?

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4. Do You Need an EIN and Separate Bank Account?

Probably. What’s an EIN? It stands for Employer Identification Number and is how the IRS identifies your business if you aren’t a sole proprietor using your social security number. If you form a separate legal entity, you will need both an EIN and a separate bank account. Even if you don't form a separate legal entity, I still recommend getting both. The separate bank account makes tracking your income and expenses so much easier. It will save you a lot of time when you’re gathering your information to prepare your tax returns. The EIN is good to have so that you can have something other than your social security number to provide to those you do business with. Customers may need it for 1099 purposes, and if you are required to send 1099s to vendors, you’ll have your EIN to provide on those forms instead of your social security number.

Getting an EIN is not difficult. Please follow this link and the instructions will walk you through getting your EIN: Apply for EIN.

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5. Do You Need to Register for Sales Tax?

Probably! Sales tax definitely deserves a separate blog post, and I will be creating one soon. Sales tax laws may vary from state to state and you can read about yours on your state's Department of Revenue website. Digital photographs may or may not be considered tangible property for the purposes of sales tax, and whether or not they are subject to sales tax may depend on how they’re delivered: via USB, DVD, etc., or via digital download. Another consideration is where your client lives relative to you, and where they takes receipt of their photos.

Here is an example from my photography business. I live in NC in a destination resort beach town about an hour south of the VA border. My client base consists of local families, visiting families, and people coming to the beach to get married. My clients may come from NC, VA, MD, DC, PA, NJ, OH, or NY. If my client lives in NC, I need to collect and pay sales tax. If my client lives out of state and I deliver their photo gallery after they returns home, the sales are not subject to sales tax. In NC, all digital photographs and the associated session fees are subject to sales tax. That is not the case in CA. The rules may be different depending on where you and your clients are.

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6. Do You Need a Budget?

Yes! Regardless of where you are in your business, I encourage you to put time and thought into your budget. What do you want from your photography business? Is it a hobby that will bring in a little extra money for luxury items like a Mercedes? Do you want to replace income from your full-time job and work in your photography business full-time? How many sessions and at what average price do you need to complete to achieve your income goals?

Start with your expenses and review them in terms of a year. What are your start-up costs, e.g., licenses, entity registration, legal fees, accounting fees? What equipment do you need to buy, e.g., cameras, lenses, carriers, Speedlites, tripod, SD cards, batteries, computers, monitors, space heaters, infant bean bags, wraps, and blankets? Research what you really need versus what you really want for the particular type of photography you’re focusing on. I know exactly what equipment I need and exactly what order I’m buying it in based on need priority. What are your ongoing monthly expenses such as phone, Internet, education, insurance, travel, conferences, trade association fees, automobile expenses, and taxes? How much money do you want from the business to support yourself and your family? Sum these, then add a 10-20 percent cushion. Those are your expected annual expenditures.

Next, think about how you are going to fund your expenses. Will it be from the operations of the business, savings or gifts from family, or debt? I do not recommend going into debt, but that’s your choice. Consider reading or listening to some of Dave Ramsey’s materials before you decide to fund your photography business with debt. 

I want to fund my business entirely from the operations of the business. If that is your choice, your total spend as calculated above will be the revenue you need to bring in from your business. If you are using external financing options, subtract those amounts from the total expenditures, and that is the revenue you should budget.

Now, let’s focus on the revenue and break it down into parts. How much do you charge for your sessions? How many sessions do you need to complete in a year at your average rate in order to earn your revenue number? How many session slots do you have space for on your calendar? Can you physically earn the amount you need based on these numbers? If not, do you need to raise your prices?

Finally, consider the timing or your revenue and expenses, or cash flow. When does the cash from your customers come in and when do you have to pay your expenses? You can build an Excel model to calculate your cash flow or use an external program to help you (I like Futrli). But if you hate numbers, I suggest getting help with this. It’s an important consideration. Most photographers have seasonal fluctuations in their businesses. Even if you have plenty of sessions booked in the fall, will you be able to survive winter and have enough cash?

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7. What's the Best Way to Track Your Income and Expenses for Tax Purposes?

Xero. There are many options available. Xero is my favorite. It is relatively inexpensive, built for the cloud, and intuitive. I used Quickbooks for years and I have used Xero for years. I prefer Xero. I see a lot of photographers using accounting software that doesn’t allow for double entry accounting (e.g., Quickbooks Self-Employed and Freshbooks). Double entry is a basic accounting standard that essentially means every transaction affects at least two accounts. If you’re not using a double entry system, you’re only seeing half of the financial picture. These systems are definitely a step in the right direction, but it’s not enough if you file your taxes on anything other than a Schedule C. As an accountant, it only tells me half the story. I need the balance sheet to see the whole picture. 

A spreadsheet is the other option I see photographers using. I’m going to make a bold statement and guarantee you'll save time and be far more effective if you use an accounting program as opposed to Excel. In addition, you’re more likely to miss something or make a mistake with a spreadsheet.

Xero pulls in your bank transactions automatically and basically all you need to do is code them and make sure your bank account is reconciled (ties to the actual balance in your bank). You can automate the bulk of that process as well or pay someone else to do it. Xero allows for unlimited users. Can you imagine if all you had to do at the end of the year was send an email to your accountant giving him access to your books and answer a few of his questions? No going through receipts, entering them in a spreadsheet, categorizing them, driving to his office, spending all that extra time. If you really hate numbers, I don’t know why you would choose this option. Accounting software will help you spend less time with numbers.

One more thought on this topic: I feel like photographers and creatives in general have been told for so long that they’re bad with numbers and that they don’t need a full set of books, aka a complete accounting system that allows for double entry accounting. I completely disagree with both of those statements. Photography is a business just like any other business and you need accounting to properly manage your business. As far as being bad with numbers goes, if you can figure out how to take a sharp, properly exposed photo in manual mode in different lighting situations, you can understand what you need to know about accounting and taxes to effectively manage your business. You don’t have to dive deep, just understand the basics and work with someone who can help you with the rest. You just can’t scale and grow if you ignore this piece of your business.

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8. How Should You Bill Your Customers, Collect Payment, and Track Interactions With Them?

There are so many excellent options available today to help you, and most are relatively inexpensive. Customer Relationship Management systems (CRMs) allow you to set up email templates, schedule automatic personalized emails, and help you keep track all of your follow-ups and leads. They track your interactions with your customers and take you through a sales pipeline, so that you can more effectively move prospects through your sales process. Examples of CRMs include 17 Hats, Honeybook, and Hubspot.

For customer invoicing and payment, you may be able to use your CRM. You may use your website or fulfillment solution, such as Shootproof. You may use your accounting software. These are great solutions. The issue with all of these is getting them to talk to each other. There are no photography solutions that I’m aware of that automatically integrate with your accounting software. For example, when you transfer money from your fulfillment tool (e.g., Shootproof) to your bank account, that amount may include more than one customer payment, sales tax, and be net of credit card processing and lab fees. In order to record this in your accounting system correctly, you have to make some manual adjustments. I’m working on a solution to automate that. More to come.

I use Xero to bill my customers and include a link on the invoice that allows them to pay via Paypal or credit card. My website and fulfillment is through Zenfolio. When my customers order prints, they do so directly through Zenfolio. When that happens, I create an invoice in Xero and match the payment from Zenfolio to the invoice in Xero. I use Hubspot to track my interactions with my customers and prospects, but will likely move to a CRM solution that’s built for photographers.

Whatever solutions you use, it should make your life easier. If you find that your system is frustrating or lacking, know that there are options for you and people like me who understand them and will help you design a workflow that is best for you. The more you can automate, the more time you have to work on your craft.

Photography Accounting, Photography Business, Tax, Accounting, Xero

9. What Business Licenses Do You Need and Where Do You Need to Register?

It depends. This is usually determined by the county or town you live in, as well as the state. Where I live, I don’t need a business license, but I do need a privilege license from the state. To find out what you need, start by searching your town, then county, then state, or talk to a professional that can help you.

Conclusion

Starting a photography business can be overwhelming at times. There is so much information available: sometimes it’s not accurate, and sometimes it takes you around in circles. Please don’t let that stop you. Understanding what you need to know is the first and hardest step in my opinion. Once you have your checklist, you can address each item and get the help that you need. After you have your systems set up and automated as much as possible, you can focus on your craft, and that’s what I want you to be able to do.

Please comment, ask questions, and let me know what other topics interest you. I'd love to hear from you!

Disclaimer: All data and information provided in this article is for informational purposes only. The author makes no guarantee as to the accuracy, completeness, timeliness, suitability, or validity of any information and will not be liable for any errors, omissions, or delays in information. In addition, it does not constitute, nor is it a substitute for, legal or professional advice. 
 

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4 Comments

Mark Van Noy's picture

For double entry accounting folks may want to take a look at GNU Cash (http://gnucash.org/) The price is certainly appealing: free.

Kim Crouch's picture

Thanks Mark! I will definitely look into that.

Will Taylor's picture

So in NC are you paying 7.25% sales tax monthly? I just went full-time and that is the one thing that has confused me.

Kim Crouch's picture

Hi Will - The total rate depends on the county. Mine is 6.75%. The frequency of payment depends on how much sales tax you collect. Here's a link to the filing frequency and please feel free to email me at kim@photographyaccounting.com if you need more help! https://www.ncdor.gov/taxes/sales-and-use-tax/sales-and-use-tax-filing-r...