Yesterday, I read a tweet about how artists must see themselves like start-ups—they are in business and must treat their business as, well, a business. While the author was referring to musicians, the point is absolutely true for all artists—writers, photographers, designers, et cetera.
Self-employed does not mean you don’t have a job or that you are not in business. In fact, it’s the opposite. You are more closely tied to your business than regular employees. Being self-employed myself, I know whereof I speak (I’ve not had an actual employer since the 20th century). There is a special intimacy between the worker and the work and the money it brings in that doesn’t, or at least doesn’t usually, occur in employees.
I think for artists, that intimacy may be even deeper since, generally speaking, you are expressing something inside you in your work. Or at least trying to, when you can, even when you’re making commissioned work.
Sadly, though, too often that intimacy includes a mingling of Artist and Artist’s Business, especially in the financial sense. This, dear readers, is a really bad thing.
From a legal perspective, it can make for lots of issues. For one example, mixing the personal and the business can affect any corporate veil you may think you have because you have an LLC or incorporated. When the finances are mingled and corporate formalities are not followed, someone suing you has a much better chance at getting to your personal assets (“piercing the corporate veil”).
More importantly, though, if you don’t treat your business like a business, there will come a day when it will bite you in the butt—like when you are trying to get credit for some major purchase, like a car or, more importantly, real estate.
When you want to buy a house (or even rent one in some places), proving your income and your business’ viability is crucial. Self-employed folk generally have to provide extra documentation to prove they are a good risk. We have to provide P&Ls, balance sheets, and bank records. Since we all try to get our taxes down through deducting every possible business expense, (self-employment tax is a pain) our tax returns might show we make less than we actually do. If you’ve been claiming some personal expenses as business expenses, this will be even worse (and it’s illegal).
Now, with COVID, it’s even harder to get a mortgage if you are self-employed. Fannie Mae has imposed extra hurdles to make sure potential borrowers aren’t faking it. I know because I have just been through this.
My partner and I had been pre-approved for a loan larger than what we ended up asking for; but we just learned that we had a real chance of not getting the loan we needed because of those new proof requirements. The requirements are changing often right now and, lucky us, the newest changes happened just as we went into contract. Surprise! On top of the usual pile of documents, I needed to prove that I had more business in the pipe, so to speak, and that my business has income fluctuations throughout the year, and that those trends are fairly consistent over time. Holy cow!
Now, I’m religious about my bookkeeping and records-keeping and keeping my business and personal finances truly separate (not to mention my firm’s trust account separate from it all, too) so, luckily, I could produce the extra reports and statements necessary. Short answer: we got our loan. But I know too many artists who do not take the time to keep things separate or to even do some effective bookkeeping. Yikes! Those artists would be totally screwed.
Keeping accurate business records and keeping them and your accounts separate from your personal ones, is vital. If you treat your business like a business, your records will be there when you need them. Don’t beat yourself up if you haven’t been doing this—just start now.