003 - How do Taxes Actually Work for a Drag Professional
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On this episode of Drag Tax, we're calculating net business income. I'll be walking you through how the US calculates our income tax. You'll get a general understanding of how our taxes work and operate.
If you ever win a cash prize in a drag competition, you'll understand how that impacts your taxable income. Understanding taxes also helps you know how much you need to allocate for taxes from the money you make in tips or from gigs. This helps you know how much you'll need to save and owe at tax time so you aren't falling behind on your taxes.
To get started, we're starting with tax forms. I like to think about tax forms like Russian stacking dolls. The main form on your taxes is like the cover page of a binder. Inside the binder if a bunch of forms. If you have simple taxes with no income, you technically wouldn't even need to file a return, but if you wanted to, i.e. to get a credit or refund if you're owed one, you'd fill out your basic name, address, social security information and a few questions and that's it. Only the first page in your binder is filled out.
If you have more information, you'll fill out a form 1040 that will reference additional forms. If you have drag income, that's self-employment income and we will take tax deductions and start to build a history of self-employment income so you can take the Schedule C form you will get as a reference for income if you need it to rent an apartment or buy a house in the future.
Line 7A of form 1040 shows your income. You won't see a line for freelancer income, you'll see 7A which asks for Other Income and directs you to Schedule 1. On line 3 of Schedule 1 it asks for business income. In order to figure out your business income you need to go to your Schedule C. The Schedule C also has a section for expenses that you will deduct from your income. Once you fill out your whole Schedule C you'll get your total amount of business profit that you have and then that number will get carried back to your Schedule 1. You'll fill our the rest of the Schedule 1 with additional info such as other sources of income, adjustments, deductions, etc. Once you get these total from those lines, you'll put those totals back on the form 1040 which will then have your entire tax picture on it.
A question I get a lot is, but Braden, do I actually have a business? The answer is probably yes, and it all comes down to if you intend to make a profit. For example, if you're getting into drag, going out and buying makeup and watching YouTube tutorials, if you aren't booking gigs and bringing in money from drag, it's not yet a business so the makeup and supplies are not tax deductible.
But what does having a business really mean? The downside is it means we might owe more in taxes. The US charges income and self-employment taxes. We pay income taxes based on our tax bracket, and everyone who has self-employment taxes through earned income, you pay additional taxes on that to pay your share of Medicare and social security. The upside is a business can show a loss, so if you're starting out and not making a profit yet, that's okay. We can't all expect to be profitable in our first year, especially as a micro business.
If you don't have pay stubs from a job, you'll need your Schedule C as proof of income when needed. If you want drag to become your full-time job and fund your lifestyle, it's important to get a legitimate business now and set yourself up well to grow.
It's important to note that there are two types of tax forms - there are informational tax forms and then the forms that go on your tax return. As previously mentioned, there's the 1040, Schedule 1, and Schedule C that all go in your metaphorical tax binder. Informational forms are given to you in order to help you complete your tax form, like a 1099. If someone pays you over $600 they legally need to give you a 1099 tax form that gets filed with the IRS that says you were paid $600 or more so the IRS can expect for that money to be reported. The business that pays you reports it as an expense and you report it as income. These forms are sent out in January.
Click here to learn more about 1099s.
The first step in calculating our tax liability (the amount we're going to file in taxes) is finding our business income. We want to look at a profit & loss statement. This statement is internal, you never send it to the IRS, it just helps you track your income and expenses. We have revenue at the top, then cost of goods, then gross profit.
Revenue is all the money we bring into the business. Cost of Goods is the amount of money that goes into physical products you're selling, for example the amount of money you spend on creating merchandise. If you spend $2,000 on merchandise cost of goods and sell it for $5,000 you have $3,000 in gross profit. Then when you add in business expenses, for example travel costs to Drag Con, those will be deducted from your profit. You only pay taxes on your profit.
If you have multiple revenue streams in your business, for example think of Trixie Mattel and all the different avenues she has like her tours, bar, motel, music, and makeup company. Trixie could have businesses for each, or she could have all different revenue streams under her one business. You can have different revenue sources come into your one business bank account and this will all be added to the top revenue line of your profit & loss statement. Whether you should separate those into different businesses is more a legal question that I will cover in a future episode.
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