Note: This is for US artists, as it deals with US law and tax requirements. Can’t speak for int’l artists. I am speaking as a businessperson, not a lawyer. Contact your local tax preparer for questions about your individual scenario.
You are a US artist.
You run a business selling your artwork and products made from it - like prints, charms, that kind of nice con stuff. Your “expenses" are the cost to produce your product: the money you pay to the person or company who creates your products so you can sell them in your shop or at a con. Your "profit" is the difference between the sell price and your cost.
Let’s say that it costs you $1 to produce a print, and you sell it for $5. Your profit is $4. Because you have organized your art as a business, you take that $1 as an expense and pay taxes on the $4 profit, whatever that tax amount might be (in the simplest terms). If you didn’t take the expense, you would be paying taxes on the full $5.
Now, you need to be aware of basic tax requirements: if you spend $600on any US contractor or vendor in a calendar year as an expense, you arerequired to file what’s called a 1099-MISC*. It is sent to both the IRS and the vendor. The 1099-MISC reports the income you spent with the vendor to the IRS. The vendor also receives the 1099-MISC and uses it on their taxes to report that income they received from you. The IRS will check your 1099-MISC reports against what the vendor reported to make sure it adds up.
* You do not need to file a 1099-MISC for doing business with a corporation (“INC”). This is not always the case with LLCs, as they could be sole proprietors. Contact your tax preparer if you aren’t sure if you should file a 1099-MISC on a particular vendor, or whether you should request tax information from a particular vendor.
To fill out the 1099-MISC and fulfill your tax obligations, you need tax identification information from the vendor. Usually, you do this by sending what’s called a w9 Request For Taxpayer Information to the vendor. They fill it out with their name, address, SSN or EIN, sign and date it, and return it to you. Because you need the name, address, and tax ID number (SSN/EIN) for your 1099-MISC, you need all of this information to be in compliance with the law and send out your required document.
If your vendor tells you that they do not reside in the US, then you ask them to provide what’s called a w8-BEN, the Certificate of Foreign Status of Beneficial Holder for United States Withholding and Reporting. This, which the non-US citizen fills out, will tell you their name, address, location, and sign and date the statement that they are a citizen of the other country.
When a vendor is not in the US, you do not need to provide them a 1099-MISC*. However, you still need to keep their w8-BEN in your records to prove that this vendor is outside of the US and the IRS does not require you to file a 1099-MISC for them, in case the IRS ever asks you to provide proof. The important part is that it’s legal proof and if you do not have this proof, we get into some trouble with the tax code.
* Provided the income isn’t “US-Sourced” (meaning, the non-US citizen isn’t providing you these services while being in the US), you don’t have to file a form. If it is US-sourced, you have to file Form 1042.
If you do not collect either a w9 or a w8-BEN, there are scenarios where you could become liable for the back taxes and penalties:
- If the vendor is a US citizen, you are penalized for not sending out the 1099-MISC in compliance with the law (as there is a deadline to do it with every tax year in January of the following year).
- The IRS may disallow the expenses you took that you did not report on the 1099-MISC for the vendor. This means you will have to pay back taxes on that money you took as an expense, as well as a possible penalty.
- If the vendor is not a US citizen, and you are unable to prove this by providing the vendor’s signed and dated w8-BEN, disallowing of the expenses may happen, back taxes, and you may receive a penalty, similar to the first situation.
Clearly, it is very bad to do business with companies that will not provide you with their tax identification information.
Note: You do have the option of performing backup withholding with an individual or company that won’t provide their tax information. As of recent publications, this means that you take 28% of the payment due to the vendor and remit it to the IRS. However, this is a very complicated process, and as one can imagine, it is likely that the vendor will not do business with you anyway if they are not getting their full payment.
The magic number is $600 — $600 is when you are required to file 1099-MISC. If you purchase $600 or more in a calendar year from a vendor for your business, then you need to obtain their tax information, whether w9 or w8-BEN.
It’s not worth dealing with an audit, or having an audit appear and being unable to explain why you have no tax information for vendors you spent $600 or more with. It is not worth paying penalties and back taxes. Be smart and follow the tax laws, and if a vendor refuses to provide you with their tax information, refuse to work with them.
Form w8-BEN: www.irs.gov/pub/irs-pdf/fw8ben…
Form w9: www.irs.gov/pub/irs-pdf/fw9.pd…
Form 1099-MISC: www.irs.gov/pub/irs-pdf/f1099m…