The Tax Man Cometh - Microstock Edition
You can always spot the least liked person just off stage at every presentation of lottery winnings. They are the people who are not outwardly smiling, likely wearing a dark suit, and carrying a briefcase of some sort. This is the IRS agent, cooly waiting to advise you of the taxes you now owe, and you owe them now. (IRS regulations here). Your 25% or so goes straight to the tax man. So, that $100k oversized check? Actually not cashable. The real check will be just $75k, since the lottery payor has to withhold those winnings. Why? Because many lottery winners squander all their winnings, and then when it came time to pay the taxes, they had no money.
For some time, I have been trying to get into the heads of microstock photographers that they are running a business, whether they think they are, or not. No more 1040EZ forms, you must report that money you got when it was reported and you got a 1099. A rude awakening comes for the microstock photographer who sold 2,000 five-dollar-downloads, and collected their 20%, or $2,000. You'd think that was a sweet deal, until you had to pay half of it to the government, leaving you with $1,000. But, well, it seems that maybe more than a few micro-stockers are not paying their taxes properly, perhaps? Foreigners, who have been getting the full payments are - gosh, the shock! - not paying taxes on the income?
According to the IRS website (here), "U.S. source income paid to foreign individuals amounts to $140 billion each year. Most types of U.S. source income paid to a foreign person are subject to a withholding tax of 30%." Here's the big kicker - "The person making the payment is considered to be the withholding agent. You are a withholding agent if you are a U.S.or foreign person that has control of any item of income of a foreign person that is subject to withholding....As a withholding agent, the payer is personally liable for any tax required to be withheld, independent of the tax liability of the foreign person to whom the payment is made."
YIKES!
This is likely to mean that if there are several thousand micro-stockers who are foreigners and have recieved payments and - (again) gosh the shock! - not paid their taxes, the microstock company could be liable for that tax. Uh oh. The IRS stipulates "The penalty for not filing Forms 1042-S and1042 when due (including extensions) is usually 5% of the unpaid tax for each month or part of a month the return is late, but not more than 25% of the unpaid tax. Additional penalties apply for failure to provide complete and correct information or if you fail to provide a complete and correct statement to each recipient. The maximum penalty is $100,000 per year."
I guess maybe a few microstock agencies will be looking at a few $100k bills for the past few years, perhaps?
According to Microstock Diaries (here), "Shutterstock have announced that they’ll be withholding 30% tax for non-US contributors in order to comply with US tax laws."
Microstock Diaries characterizes contributor reactions by saying "Affected contributors are understandably upset." Then they outline several of the complaints (followed by our answers):
Q: taxes haven’t been withheld before, so why are Shutterstock starting now?
PBN&F Answer: Because it's the law, and they were not in compliance with the law, which will cost them a lot of money.
Q: other agencies don’t do this, so why is Shutterstock doing it?
PBN&F Answer: Because other agencies are making the same mistake, and just like everyone is now charging for a paper airline ticket, and checked baggage, the rest of the microstock agencies will fall in line.
Q: why do I have to pay tax to the US government when I have nothing do to with them?
PBN&F Answer: Because your assets earned money on US soil, among other reasons.
Q: why do I have to give personal information to the US government?
PBN&F Answer: Because a US company is paying you money, among other reasons.
Q: can’t Shutterstock pay for this themselves and not penalize foreign contributors?
PBN&F Answer: Because this is the tax on YOUR portion of the income, that YOU owe! Shutterstock will be paying their own taxes on their profits as well. You are not being penalized - you are paying what you owe, fair and square.
Microstock diaries then takes a slight (albeit deserving) swipe at the contributors, when they say "The demonstrated gaps in understanding of international business in these complaints extended to misdirecting blame and anger toward Shutterstock." And here, they are right. Shutterstock is not doing anything wrong here - in point-of-fact, they WERE doing something wrong in not withholding, and now they are getting in compliance.
Many members are apparently deleting their portfolios from Shutterstock. Good. A few thousand less images there means fewer $30 Time Magazine covers.
Microstock Diaries characterizes contributors thusly - "Most microstock contributors are in business so they’re used to doing things like filling out forms and paying taxes. However, a not-so-small number of contributors, it seems, are not so comfortable with this change."
I believe that if you look at the number of microstock contributors who actually earn a full-time living off of microstock versus those that just get their kicks from seeing their images in print and whose income cannot support them full-time, you would find that the vast majority of them are running their businesses very poorly - essentially at a net loss.
Oh, and one more thing - you can run your business at a loss, but not forever.
The IRS, (here), states:
An activity is presumed carried on for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses).Welcome to the real world my fellow photographers.
If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.
Please post your comments by clicking the link below. If you've got questions, please pose them in our Photo Business Forum Flickr Group Discussion Threads.
22 comments:
All this means is that microstock companies will register and operate offshore. There is no reason for the company to be registered in the US anyway. Its one of the more stupid places to register a company in the world anyway.
For making the picture complete you should mention that only a small minority of microstock agencies is located in the U.S.
IStock is located in Canada, some others are located in Eastern Europe, even Corbis has set up its microstock department Snapvillage in Ireland and not in the U.S.
Non resident aliens (foreigners) earning money from the US can apply for a thing called an ITIN using a W-7 form from the US IRS in order to avoid paying the 30% withholding tax. Sure it's a PITA and you'll need to jump through a bunch of hoops to get it but I'll be damned if Uncle Sam is getting my hard earned cash.
Harrington Vs Microstock, Part two:
aren't we talking about people earning a few hundred dollars a year. Ya,right, the IRS will go after them. especially if they live in Croatia !!
Hey JH, eat a reality pill and get off your high horse. You sound like a local store owner being invaded by a Wal Mart. Your blog smells of revenge, jealousy, pettiness, anger and a little senility.
Why don't you use your passion to be creative and inventive instead of throwing firecrackers at your neighbors? huh ?
The bottom line is, at least in the US, if you sell something the gov want s it's 20-30%. whether it's your services, stock, whatever.
Common sense for a half decent business person is that anything above and beyond a $600.00 payment from one source must be reported.
On another point, if you sell any equipment that you use for work, you also must pay tax on that too.
Bottom line is no one wants an audit. So it's up to the person how and whether to report, or just do the right thing.
Ibrahim:
I'd say that after reading your comments I would tend to think that you're the one who sounds a bit more put out and pissed off, not John. Once again John's post has nothing to do with hatred or revenge it simply reinforces what most professional photographers have been saying for awhile now. As a photographer, or in this case a microstock company, you cannot have a sustainable photography business simply by selling more by charging less.
I guarantee that the vast majority of "professional" photographers out there today aren't even registered as a business. I doubt most if any of them:
Have a written business plan,
Insure their equipment beyond their homeowner's policy,
Have liability insurance,
Have properly registered their business,
Properly pay taxes on their business (including sales tax),
Charge what their time and effort is REALLY worth.
Rather than take offense to John's posting, why not look at it as a wake-up call? If you're going to play the game then play it right, not just for the benefit of the industry but for yours as well. And for those of you always so quick to jump on JH, I have only one question: "Why so defensive?"
Mr. Levin:
Actually all payments must be reported. It's just that certain payors are only required to provide you a 1099 if the payments add up to $600 in any given year (not per payment - six $100 payments in a tax year would require a 1099 issuance.) It's common for people to think that if you don't get a 1099 for it it's not reportable income, but this is not the case.
One of the things that the lamented (at least by me) PhotoShelter stock agency did right was do withholding on payments to aliens from day one. They got a lot of flak for it but they were in the right, and I think that Mr. Harrington is correct in that not doing the same is going to cost some agencies a lot of money.
Steve,
I, along with many others, are getting annoyed by this high road you "pros" are taking versus microstock. It is a business that is here to stay wheter you like it or not.
You complain about people selling for $30 images you do not have. When was the last time you, or John even thought about shooting a glass jar with pennies in it ? huh ? when ?
Stop putting yourselves as the guardians of photography. The fact that you didn't even see microstock coming shows how little you know about this market.
Keep shooting your local bourgeois assignments and leave us alone ! learn to live with it and move on. The Gentlemen's club has had its front door broken and invaded by masses because you had refuse entry for so many years. People like you, and John H are the people who created microstock by being so exclusives and stubborn.
eat it, now ? huh ?
MarcWPhoto,
Thanks for sharing that. I stand corrected, and you can teach an old dog....
Jonathan
Steve is an accountant and not a full-time photographer. He also assumes much, a poor behavior to have.
This just means more microstock-for-the-masses outside the US.
While all the hate against microstock is sometimes justified, it can still be it's own worst enemy. Along with the bargain photos there are umpteen photos of low quality and double that again of images of all types that are not adequately keyworded.
So to the pro's that hate on microstock. Keyword your images, show that you can consistently produce quality images and sell at the price justified by your talent and operating costs....but realise that for every one photographer that can take 100 excellent shots, there are 1000 ammeters with a 1% hit rate selling via microstock...and in this day and age who isn't going to pay $30 rather than $3000 for a cover image if they don't have to?
One area I see the pendulum swinging back is the are of weddings, portraits, commercial, functions, asignments etc. Not too long ago there were so many $50 shoot-n-burn wedding shooters it was impossible to justify even $1000...now $1500-$2000 is cheap.....the customers have realised the value of a pro.
But microstock.....anyone can do it and there are more people happy with the kudos of an image in print that money in their pocket.
Microstock however is here to stay...and thanks to the IRS is now heading offshore as stock agencies would rather keep non-US photographers and the commission they bring in than alienate (pardon the pun) them by forcing them to pay tax in a country they would otherwise have nothing to do with...not to mention the sour taste of filling in tax forms and jumping through hoops to get your money back. If people were willing to do that they wouldn't be signing up to a set-and-forget microstock agency.
Good lord...I just re-read my comment and it sounds a bit disjointed.... I need more coffee....and less distractions while typing up comments.
long story short...microstock sucks but what you gonna do? Something else, that's what. Meanwhile let microstock shoot themselves in the foot....problem is they have a lot of feet.
Since the microstockdiaries post you quoted (may 29th) Shutterstock have launched a 'tax centre' where most non-US contributors can fill out tax forms online reducing the tax that is withheld. The remainder that is withheld can be offset against tax paid in your local country (depending on earning) the whole thing was a storm in a teacup - but the comment about some microstockers not paying their tax is probably true - at least for the low earning amateurs, for some of these people it's the first time they have ever earned money outside of their full time job. veer marketplace (another agnecy) also has a similar arrangement for tax forms and like 'anonymous' said most of the others are based outside the US.
Ibrahim, I can not tell you how glad I am that you posted what you did, thank you!!!
What you have written illustrates so well the pure hatred, ugliness and profound ignorance many of your tired ilk have put forth. I have seen many things in my years as a photographer, including ugliness. But nothing as ugly and as deeply bitter as the resentment that some of the people who bathe in the waste waters of microstock can often show.
Firstly, I am a successful photographer who earns a good living off of stock because of a few things:
One, I *did* see microstock coming in the mid 90's, so I made other arrangements in terms of how I do business. I saw sings of this first in how greedy agencies like Getty and Corbis started gobbling up smaller grassroots agencies and treating contributers like cattle, I wanted and *still* want nothing to do with that.
Two, I chose a specific niche in which to not just photograph, but to live my life around, pasionately. I made sure my images stood out well above my competition in traditional stock models, not just microstock. I also worked really hard at doing the best I could in terms of marketing and professional business practices.
As for what you call a "Gentleman's Club", if you are talking about being rejected by some higher power of photography, well that is where you are gloriously ignorant. You see, for decades the door to success in photography has been wide open to anyone who has the talent, drive and commitment to succeed. If you were lacking in those factors, that is not anyone's fault but yours. It sure as hell is not mine or John Harrington's fault, so you need to accept that is is you who failed you, not us.
Furthermore, Microstock is a business model, but not all business models succeed and in the case of microstock, there are clear signs already that it will become so saturated that most people who contribute will make less and less over time, not more and more.
All Mr, Harrington is trying to do is educate those who are interested and pass that information along. If you can not see the value in that, then you are truly doomed as any kind of business person. The most valuable thing any of us have in this life is our time. I value mine a lot, many people who accept these new business models obviously do not realize what time they are actually pouring down the drain.
But Mr.Ibrahim El Sahihi, again, your post ***REALLY*** tells it all, thanks bud!
Just sell your pictures for less to avoid reaching the minimun required for filing. If they give you photo credit that should be all you need anyway for most images until the exposure has people giving you money because of your name and than start your own blog and make the big bucks on advertising. Free works in the world of not!
hey John, if you ar going to reply to my commentaries, please use your name and not "anonymous". That is really pathetic !!!
Hey Ibrahim,
If you're going to argue something, do so in a way that doesn't make you look like a 14yo twat ...and the URL link?...real mature there mate...well done.
If you're going to troll...at least put in some decent porn links.
Ibrahim --
Not once have I posted on my own blog anonymously. For you, I'm not about to start.
-- John
While I've never posted anonymously on John's blog, I'll confess: I have posted pseudonymously, always using the same pseudonym.
What John fails to mention is that, yes, you have to pay taxes on microstock earnings, but you also can take tax deductions on your photo-related expenses. A good tax advisor can help you make wise choices so that the one balances out the other, and you wind up the tax year with a lot of photo gear and a low tax payment.
kickstand:
That's completely true, but there is a hidden downside. If you claim expenses against income, your business has to consistently generate a profit, and the IRS will look at it much more closely. While there is no statutory definition of business vs. hobby (as in, no bright-line rule as to what constitutes a business vs. a hobby which generates a little income) if you don't make a profit three in seven years or more, most tax professionals will warn you that you run risk of audit and adverse ruling, which means you lose all your deductions for open years and have to pay back taxes, interest, and penalties.
If you're not in it to win it, just claim the occasional check as miscellaneous income and don't bother with the deductions. *Especially* don't do this if you have reasonable outside income/resources and use that to buy expensive equipment which your few hundred dollars in microstock royalties don't begin to cover. The greater the discrepancy the more likely the IRS will be to challenge your deductions.
While I'm sure you knew that, I just wanted to make sure no hobbystockers got all excited about this.
I mind me an occasion where a co-worker of mine excitedly announced that you could take anything you had a receipt for off your taxes - she was saving her grocery receipts, receipts from Penney's, etc. How she got this notion I have no idea and she would brook no argument. She quit shortly thereafter and I never found out if she went to the pokey or just paid exorbitant penalties.
M
I want to comment on the ongoing discussion of how non pro photographers take jobs of pros. It looks to me that you're trying to have the accountants become jobless by doing your own taxes. But why? Is it because you're smart enough to figure it out yourself? Exactly that's why people are smart enough to figure out how to deal with camera even if they are not professional.
So here, deal with it. Soon photography is not going to be technically difficult and the only reason people would even hire a photographer is because they don't want to bother themselves.
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