Financial basics for your creative side hustle

Many artists begin making art as a hobby, which transitions into a creative side hustle after they hear, “could I buy that off you?” enough times. Once artists get comfortable with selling, the call of becoming a full time artist gets louder. This article is for artists anywhere on this spectrum – all of us must learn how to track the money we spend, make, and hold. Let’s get into financial basics. 

Revenue

Revenue is the money that you receive from selling your art. It’s any income generated by your art business. This can include commissions, accessories, shipping fees, tax you collect from customers, etc. Any money that comes IN as a result of a good or service is revenue.

Expenses

Expenses are any costs you have relating to your creative side hustle. When you buy paints, that’s an expense. When you have to put gas in the car on your way to the art show, that’s an expense. Shipping costs: expense. Art style class: expense. Paying your tax man to file your taxes at the end of the year: expense.

The biggest tip I can give is to keep your receipts. Your bank statements alone do not count if the IRS wants to do an audit on you, and some banks purge their data after a certain amount of time. 

Profit or loss

Profit is your revenue minus expenses. If it’s a positive number, it’s a profit. If your expenses outweigh your revenue to make it a negative number, it’s a loss.

Hobbyists will always have a loss because they don’t sell their work. This is okay – it’s still a great idea for personal budgeting to know how much your favorite hobby is costing you. 

New businesses often have a loss — because at the beginning, investment is required. However, with the way online marketing works, you could invest very little and make a lot very quickly. 

The average business takes 2-3 years to turn a profit, according to Freshbooks, but keep in mind most businesses fail before the first year mark. That’s why the stepping stones of hobby to creative sidle hustle to full-time artist is so common – it keeps us from failing early.

Taxes are collected on profit (NOT revenue). If you have a profit, you’ll pay taxes on the profit. If you have a loss, you have no true earnings to collect taxes on. 

Set money aside for taxes even if you think you’ll have a loss, because things might turn around and you’ll wish you had.

Art inventory

Inventory must be tracked throughout the year for tax purposes. Keep an accurate record of your paintings and their value on January 1st and again on December 31st.

Of course you’ll be tracking what sold and for how much revenue. And tracking all your expenses – with receipts. Make sure to track damaged, discarded, stolen, lost or donated pieces too. These are all reasons for a change in inventory.

If you only provide a service (think custom illustrations that you send online, with no physical product included) then you do not have an inventory. This can also look like facepainting services, tattoos, or murals. Accessories like tattoo creams ARE inventory. 

The amount you spend on raw materials (like canvases, paints) will inform you about how many potential paintings you could have on hand. From that, subtract how many were sold, and that number should be the number of paintings you find in your studio closet. Manually go in there and count them, even if you have an electronic tracking system.

If there is a negative discrepancy, then think back to if you donated or destroyed a few. If you have no idea, I’d mark them as lost or damaged. If you have more than you thought, you maybe forgot to record it when you bought those canvases on sale at Joann Fabrics last spring. 

Inventory itself is not taxable. But the IRS will ask you about “the cost of goods sold.” This is the cost of goods SOLD. If you have inventory left over, it obviously wasn’t sold. So if you spent $10,000 on materials to make your paintings, and on December 31st you have $1,000 worth of raw materials left because you sold everything else, then you would only deduct $9,000 for “cost of goods sold” on your return. The other 1k is a cost, but it’s not deductible here. This 1k cost may be marked somewhere else on the return. Same thing with lost paintings – they weren’t sold.

The taxes/inventory discussion varies depending on what type of art you make, how you operate your creative side hustle, and what your selling cycle is like. I’m not a finance professional but when I’m familiar with my inventory, I can fill in the boxes on my own taxes no problem. 

Bottom line: keep track of your inventory! 

Separate your bank accounts

I always advise artists to separate their money into two accounts to make all of the tracking easier.

I choose to have a personal bank account and a separate business bank account. When I make money by selling art, ebooks or art classes, it gets deposited into the business account. When I pay myself, I send it to the personal bank account. 

If you’re a sole proprietor (aka you haven’t filed any paperwork with the state to become a different type of business) then you don’t need to separate bank accounts. But I find it’s helpful to separate for tracking purposes, especially if you have a day job as well. Digging through your account to confirm an expense is tiresome when you have to sift through a bunch of unrelated personal purchases on your bank app.

Curious about the legal setup of your art business? You can read my article on legal business setup here. Creating a business bank account does require an EIN, which requires you to file paperwork with the state. So if you’re interested in a separate biz account, that article will have helpful info for you. 

Tax filing

You’ll generally file a Schedule C form at tax time if you’re a sole proprietor (self employed, you didn’t file any paperwork with the state) or a single-member LLC (you filed as an LLC with the state but it’s just you as a solo owner).

My art business, A Cup of Cloudy, is a single-member LLC.

Schedule C is pretty much a glorified profit and loss statement. Certain things are qualified as legit expenses and some things are not. Filing taxes is generally simple for artists selling tangible goods.

When you go into art business with a partner or multiple partners, you’ll be a partnership or an LLC with multiple members. You’ll fill out different forms under this structure, not Schedule C.

If you want to hire a tax person, great. They can help answer your questions about any of the info presented here.

None of the information in this article is financial advice – I’m not a financial expert or professional – I’m just a full time artist who does her own taxes and bookkeeping. 

Creative side hustle success

Every artist needs to know these basic financial principles if they plan to be a success. It’s not fun, but it is satisfying once you make your bookkeeping a well-oiled machine and you can quit stressing over your money management. The more money you make in your art business, the more you’ll see the importance of these basic principles.

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