Things About Being An Artist I Wish They Had Told Me In Art School, Part 1, Five Things In No Particular Order
First I have to start by saying that I am not a tax or legal professional, this blog is written for general information purposes only, based on my own anecdotal experiences and to point you in the direction of where to get more information that you might not have known you needed and what kinds of questions you want to ask when doing your own research. This information is accurate to the best of my knowledge in Alberta, Canada in the year 2022. Different rules will apply in different locations and years, you should always do your own research, and if an expert disagrees with me, listen to them, not me. If anything here raises questions for you, please contact an accountant (CPA or CMA), the Canada Revenue Agency, Service Canada, Workers’ Compensation, an insurance agent or broker, or a lawyer, as is appropriate to your situation to get the most accurate information.
1—-You have to pay double the CPP premiums compared to if you have a job. A lot of people don’t realize this; many folks who have normal employment jobs don’t realize this, but when you have a normal job, your employer matches your CPP premiums. So, if you had 5.45% of your gross pay deducted for CPP in 2021, your employer matched that amount and your total CPP contribution was actually 10.9%. When you are self-employed you have to pay both employee and employer portions for a total of 10.9% (this increased for 2022 to 11.4%). Employers also match their employees’ EI premiums and add another 40% on top, and they pay the entire premium for their employees’ Workers Compensation insurance. If a self-employed artist wants to have similar protections they have to get their own insurance, and/or work on a rainy day savings. FYI, you can now opt in to the auxiliary EI benefits that cover maternity leave, bereavement leave, short term disability and caregiver’s benefit but not the main insurance against finding yourself without a job. Because of this you only have to pay the employee’s portion of the premium, which is a percentage of your income. You can now also opt into Workers’ Comp, and they also have an option for self-employed owner-operators where you can opt to include some of your overhead costs as well as personal income in your coverage. The premium is based on your industry code and benefit amount. All this is to say that while you can opt in to some programs, and you don’t have to opt in if you don’t want to, along with the 4% vacation pay that is the minimum an employer has to pay you on top of your wage, each employee costs the employer about 25-30% above their hourly wage in payroll costs that they don’t see on their pay stub so if you were at tax time to calculate what your hourly wage was and say you calculated it was $20/hour, that isn’t the equivalent of an employee who earns $20/hour, it’s the equivalent of an employee who earns about $13-15/hr. Not counting the actual value of having insurance coverage if you do become unemployed or get injured at work. And that is just comparing with meeting-the-bare-minimum-legal-requirements jobs. Now, if you start looking at what an employee really earns who has ‘a good job’ with employer-sponsored disability insurance, medical benefits, programs matching pension and/or RRSP contributions, paid sick days, paid stress leave etc… then the self-employed artist has to start earning exponentially more than the employee’s wage or salary in order to break even financially compared to that employee. The artist has to put their head down and save until they have a year’s worth of overhead costs and a year’s worth of living expenses saved because there are rarely any safety nets available to you unless you pay for them yourself and the premiums are expensive. And that’s before you start thinking about saving for retirement. I guess what I am trying to say is that if I had understood the full implications of being self-employed I may have looked more seriously at careers where I got normal employment on someone else’s payroll, and I at least might have approached my pricing strategy differently.
2-You’re going to work double-full time hours but only be actually making art for about 15% of that time. I am lucky if I get a whole day off from work in any given week, frequently I’m happy if I get a half day off. I design and make all of my artwork myself. I also am the book keeper for 2 companies, equipment technician/mechanic, Sales and Customer Service agent, Marketing, Website, General Administration, Invoicing, Chasing Overdue Accounts, Packing and Shipping department, and the Ordering and Receiving department. I spend time with clients designing custom memorials and urns, I spend time with clients designing custom awards and gifts, I spend time mounting the awards onto bases and getting plates engraved and gift wrapping, I spend time driving around Calgary delivering orders, couriering awards for engraving, I drop what I’m doing to respond to an emergency email or phone call or deal with a last minute mad-panic order, I go in to work on my ‘day off’ to accommodate someone’s schedule who wants to pick up their order. Oh yeah and writing this blog for my website is work and I have spent about 4 hours on this so far today, in the end I will have spent about 12+ hours on this blog. I estimate I work about 50+ hours most weeks and closer to 70 hours some weeks, especially during the holiday show season or heading into awards season. Never bother to ask me “Are you working today?” Assume yes. If you want to know if I’m blowing glass today ask me specifically if I’m blowing glass. I am an artist, I work my ass off, and very little of that time is spent actually making art.
3-How Tax Brackets work, how expense deductions work, and what ‘claiming a loss’ really means. It is important to know how these things all work because you have to keep track of the taxes you owe, you need to understand the implications of your business expenses, and you need to understand how your self-employment income affects your total income picture if you have a normal job as well. As an artist you sell your art and this is your gross income or gross sales. You had to spend money on things like supplies, tools, equipment, studio space, utilities and marketing in order to create and sell your art. You deduct these costs, which are your overhead costs, from your total sales (the rules are a bit different for each category so do your research). The balance of these is your net income, or, what you as a sole proprietor are “paid”, this is your income in lieu of a wage or a salary, and it is the amount you owe income tax on in April. Because you are self-employed you do not have an employer calculating, deducting, and remitting your taxes and CPP premiums every 2 weeks, you have to keep track of this yourself. As long as you can keep track of your money this is a good thing. It means instead of pre-paying your taxes and CPP to the CRA, you can set it aside in a savings account or a GIC and earn interest on it until it’s due in April. If you use book keeping software it’s really easy to keep track of. All you need to do is open your Profit-And-Loss report for the fiscal year-to-date check your profit, and the tax brackets work as follows (for 2022):
o The first $3,500 of profit is free and clear of everything.
o Every dollar after $3,500 you need to set aside 11.4% for your CPP premiums
o The federal personal deduction amount, the amount everyone gets to earn tax-free, is $14,398. Once your profits reach this amount, in addition to the CPP amount you have been setting aside you also set aside 15% of every dollar above and beyond for Federal tax. This bracket continues until your profits reach $50,197, and for each dollar above and beyond this amount you set aside 20.5% and this goes until you hit $100,000 so I’m going to stop here. https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently-asked-questions-individuals/canadian-income-tax-rates-individuals-current-previous-years.html
o The Alberta personal deduction is $19,369. So once your profits have hit this number, for every dollar above and beyond this amount you need to set aside another 10% for Alberta. https://www.icalculator.info/canada/tax-tables/2022/Alberta.html
o Clear as mud? A few of points that I want to make: the first is that you don’t pay more taxes on all your income if you find yourself in a higher tax bracket, you only pay the higher income tax rate on the income that lands in that higher tax backet. So if your income is $5 over into the 2nd tax backet, you don’t pay 20.5% on all your income, you only pay 20.5% on that last $5. The high earner in the top bracket got to keep 63.6% of their first $50,000 just like you did. And we all regardless of if we are a high earner or a low earner get our same personal deductions, the amounts that we don’t pay income tax on. I argue that this means a lot more to a low income individual but that’s another blog for another day. Back to the brackets. If you are keeping track of this, and towards the end of the year you realize you are having a particularly good year and are heading into a higher tax bracket, you can plan to spend a bit more before the fiscal year ends (for most it will be December 31) on deductible business expenses (again research the rules) and lower your tax bill because the deductions come off the top of your income. So back to the $5 over example, if you see that and spend an extra $5 on your business for something you needed anyway before your year-end, you don’t have to pay 20.5% of it for taxes. But if you don’t need the thing, you are always farther ahead by saving it and paying the income tax on it than by spending money on things you don’t need that aren’t going to help your art practice move forward. Which brings me to the other point I wanted to make here: that just because it’s ‘deductible’ doesn’t mean it’s free. I have known artists who justify their art supplies shopping sprees and beers with colleagues by saying lightly, “it’s fine, it’s deductible” as if they get the full amount back on their taxes when actually that expense gets you 36.4% of that amount off your tax bill if your profit currently lands between $19,369 and $50,197 and it will save you less if your profit is below the low amount and more if it’s higher than the high amount there. And your drinks bill will save you half that: 18.2%. so if you spend $30 on drinks with colleagues, it will save you $5.46 off your theoretical tax bill, with drinks costing you a net amount of $24.54. Every little bit helps, but if you didn’t need to go for those beers, that $24 might have been better added to your rainy day savings account.
o Claiming a Loss when you have another job: when you are starting a new business, the CRA expects that for a few years you might spend more on your business than you bring in in sales and you are allowed to subsidize that with income from your other job. If you are a sole proprietor and if you have another job to support yourself, your employer is deducting your payroll remittances according to what they estimate your income is but if you are deducting business expenses against your sales and your sales aren’t covering your expenses, the remaining balance is deducted against your employment income and you might end up with a tax refund as a result. It’s nice and it really helps. Don’t do this for too many years though; at some point the CRA will decide you are operating a hobby not a business and that you don’t get to deduct anything anymore. On the flip side, if your art practice is doing really well and you know you aren’t good at keeping track of it all and you have a job and are worried about a big tax bill in April, you can ask your employer to deduct and remit extra income tax. It is important to know thyself.
- 4-Get critical illness insurance when you are young and healthy. You will be very glad for it when you get to middle age and are self-employed with lots of overhead costs and a family to support and anxiety about getting cancer or some other awful disease. Disability insurance has its place and you should assess from time to time if you need it and how much, but there are a lot of rules that come with it and if you can do some work (say, you can do officey admin, answer emails and work on your website) you might only get a partial benefit even though you can’t physically do the one thing that you trade for money, or they might determine you can do some other kind of work and your benefit time is reduced, so maybe you are better off taking the premium you would have paid and saving it instead. On the other hand, while critical illness insurance only covers specific illnesses, if you get one of those illnesses you receive the lump payment of your benefit, to spend on whatever you need to and they don’t care if you can still do some work or what you spend it on. And the premiums are so much cheaper the younger and healthier you are when you sign up. Get the highest benefit you can manage ($100,000 might seem like a lot today but in 30 years it won’t go as far) and you want to get the kind that has a higher premium that you pay for 20 years and then have it in place for the rest of your life.
5-Why you should get a GST number if you plan to have a professional career. If your gross sales are at or over $30,000 you have to register for a GST #, you have no choice. If your gross sales are lower, you can opt to register and if you are serious about having a career as a professional artist, you should do this, and besides the fact that $30,000 in annual GROSS sales is probably not going to be enough for you to live on (it has not changed since the GST was introduced in 1991- when $30,000 was a LOT more money), here is why: In a nutshell, you keep more money in your pocket. If you aren’t registered for GST, any GST you pay on your overhead costs are included in your expense deductions. So for every $100 you spend, you pay $5 GST and on the GST part, if you are in the first tax bracket, deducting that $5 will reduce your tax bill by $1.82. If you are registered for GST you claim that $5 back as an Input Tax Credit, and then because you didn’t deduct it as an expense you have to pay $1.82 more in income tax, leaving you with a net surplus of $3.18 in your pocket after taxes. On $15,000 worth of business expenses this works out to an after-tax net of $477 in your pocket. It matters. When you are starting your art practice you are making lots of big purchases, tools and equipment, so you are paying more GST even though you aren’t selling much. That 5% makes a meaningful difference when your income is low. Now, you also have to charge GST on your sales, keep track of your sales and expenses, and file your GST remittances and that takes work that a lot of artists don’t want to do. Some artists aren’t good at keeping track of how much GST they have collected and have to remit. But if you are going to be a professional artist you need to figure out how to do this. I recommend setting up for monthly or quarterly remittances rather than once annually; this will force you to stay on top of your book keeping, and if you are the kind of person who when you look at your bank balance, your heart tells you ALL that money is yours to spend and so you do and then it isn’t there when you have to file and remit, maybe set up a savings account and move your GST balance out of your operating account once a week or once a month, as needed. Know thyself. Online accounting software makes it so easy to keep track of this stuff now.
PS- once you have registered for a GST number, you HAVE to charge GST on your sales and remit the net of the GST you collected on your sales less the GST you paid on your expenses (Input Tax Credits). It doesn’t matter if your sales were less than $30,000, you have to file the returns. If you spent more on GST than you collected you will get a refund for the balance. If you fail to remit and you have an active GST number, you will get in trouble sooner or later so if you aren’t going to do this any more you should call the CRA and close your GST account.
PPS-You cannot charge GST unless you have an active GST number. If you aren’t charging GST at a show because you aren’t registered, the sign should say “No GST”, not “GST Included”. If you are including the GST in your prices at the show the sign should say “GST Included” and your receipt should list the amount of GST for that sale as well as your GST #.
PPPS- Being registered for GST has nothing to do with your Federal GST rebate, which is calculated when you file your income tax and is based on your net taxable income.