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."
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.
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