I Like Your Work Podcast: How to Pay Yourself

In my last episode of the I Like Your Work Podcast, I shared the one key thing you need to do to get started with control of your numbers in your creative practice. Now I’m answering the question behind why you haven't done it yet: how to pay yourself.

If you’re ready to de-stress your taxes, save time and feel understood so you have the freedom to create your biggest, boldest work, click below to join the FREE masterclass at Sunlight Tax: De-Stress Your Taxes and Get Back to the Studio (for Creators)

Business and Personal Accounts: Keep ’em Separated

This article originally appeared in ArtFCity on 6/13/17. Updated 7/23/2021.

There are a million meaningful reasons to operate an arts business, from creating revelatory art experiences for the public, to a commitment to a tradition or the love of making hand-crafted objects. But at the end of the day, if it is a for-profit business (and not, say, a non-profit), a major purpose is to make money to pay for the expenses of living. Why, then, is it so important to keep the business financial transactions separate from our personal ones?

The reasons are simple. It protects you from tax trouble and legal trouble. And it’s the law.

Let’s say you operate a letterpress. Your core income is from printing high-end wedding invitations, but your true love is printing full color publicity posters for rock bands. This is a totally respectable business model, and while you love what you do, you are definitely earning a living. But the business part has never been your strong suit, and you have been depositing your printing business money into your personal checking account, and using that same account for personal expenses like buying groceries and clothes, and paying rent.

Now let’s say that after a string of bad years in your printing business due to forces beyond your control—a boycott of your state because of a recently passed piece of transphobic legislation, for example—you get audited. So far, this is all pretty normal—people with a string of losses in their arts business will tend to get targeted for audit, because the IRS wants to check that the business is legitimate, and not a hobby or a tax shelter. Because your printing business is generally sound, and the recent downturn is explainable and not within your control, you can probably expect to come out of this audit unscathed.

But when the IRS looks at your bank records, they see one account where business and personal items mix together. To them, this is a strong indication that your business is a personal hobby, and not something you take seriously or treat in a businesslike manner. They deem it a hobby, and disallow your recent losses, resulting in you having to pay back the difference in taxes, plus penalties and interest. It totally sucks to be in this boat, and you could likely have avoided it if you had a separate business account, and you kept it clean of personal expenses. 

The IRS has a nine-point list of factors they consider when judging whether your arts business is a bona fide business or a hobby. They give a lot of weight to the separation of your business and personal accounts.

All businesses are run by individuals. When you operate a sole proprietorship and file a Schedule C for it on your personal tax return, you have no legal separation between yourself and your business. Millions of small businesses in the US operate this way, and when you’re small and not incurring much liability, it’s perfectly fine to do so. But a snag arises when you get in legal trouble.

Let’s say that you, Arty McArtist, are operating a sole proprietorship arts business. You make large wooden sculptures, and during your latest installation, one of the installers is crushed when your sculpture falls on top of him, and he can never work again. The worker decides to sue. Because there is no legal separation between you, Arty McArtist the person, and Arty McArtist the arts business, when he sues you, he can not only go after the assets of your business – your tools, your studio, your inventory – he can also go after your personal assets – your home, your car, and your kids’ college fund. That could sink you. 

There is a way to eliminate the personal legal exposure that this nightmare scenario illustrates. You can make your business its own separate legal entity. This has other benefits on top – some corporate structures allow you to raise capital by issuing shares, and potentially reduce your self employment tax – but the liability protection is the major consideration for most smaller businesses. There are different options, including partnerships, C corporations and S corporations, (and I won’t go into detail on them here), but a very common and flexible one is the Limited Liability Corporation (LLC). The main point of becoming an LLC for most small businesses is to protect their personal assets from a lawsuit. This separation between the individual and the business is referred to in law (and rather poetically, at that) as “the corporate veil.”

As an accountant, I want to warn you against the mistake that people make here. When you form an LLC, it becomes critically important that the business entity really is separate from the person running the business. The “corporate veil” must be real. Among other things, this means you must track your business books and keep a separate business bank account. If you go to the trouble and expense of forming an LLC (or one of the other types of separate entity), you are agreeing to maintain that separation.

What happens if you don’t? If you get sued, the court can “pierce the corporate veil,” thus nullifying the benefits of an LLC. In other words, in a lawsuit, your business practices will come under scrutiny, and if you’re found to be acting as one and the same as your business, not as a separate, distinct entity, then that legal protection you thought you had drops away, and the plaintiff can come after your retirement fund, your house, your art collection, and your vacation fund.

So now that I’ve scared you, what can you do to prevent these awful scenarios from happening? Primarily, you want to operate in a businesslike manner. You need to keep your business accounts and personal accounts totally separate. If there are any credit cards that you use for both business and personal expenses, cut it out, and get a corporate card for the business.

A happy side effect of keeping your accounts separate is that your bookkeeping becomes a lot easier. When you have a separate business credit card and checking account, and you use them strictly for business reasons, there is no more combing through bank statements to figure out what is business and what is personal. Your hardest problem is just figuring out which legitimate business expense category to put each purchase into.

So if I’m earning money in my business and the point of having it is to make a living, how do I pay myself from my business account? Great question. You are allowed (and expected) to move money between accounts. When you invest your personal money into your business (a common occurrence!), it’s called a “owner’s contribution,” and that’s the category you file it under in your books. When you take money out of your business to pay for your personal living expenses, it’s called an “owner’s draw,” and likewise, you record it as such in your books. Note that you shouldn’t be using the corporate card to charge a gorgeous leather jacket at Prada and then booking that transaction as “owner’s draw” after the fact – though this is the way to correct that mistake, if you make it. The best practice is to withdraw a chunk of money, in a predictable, periodic fashion (like you’re paying yourself a salary).

So the simple takeaway here is clear. Keep your business books clean and businesslike. Separate your personal and business accounts. It simplifies your bookkeeping, it’s not hard to do, and the trouble it can keep you out of is worth all the effort.

I Like Your Work Podcast: Knowing Your Numbers and the One Best Thing You Can Do Now

When you know what your profit is, you unlock the power to know what things cost you, whether you need to raise your prices and how much you owe in taxes way before the deadline. So how do you do it, and what is the one key action step that will help you right now? Find out on the my latest mini episode of the I Like Your Work Podcast.

Money Story - Christopher Denise: Building Habits and Space to Focus on Your Creative Work

Christopher Denise (he/him) is an illustrator, writer, teacher, and lecturer. He has illustrated many critically acclaimed books for young readers including Alison McGhee’s Firefly Hollow, Rosemary Wells’ Following Grandfather, Anne Marie Pace’s Groundhug Day, as well as several in Brian Jacques’s Redwall series. Christopher lives with his wife and collaborator, Anika Denise, and their family on the coast of Rhode Island.

HC: Who are you, what are your pronouns, and what do you do?

CD: My name is Christopher Denise, my pronouns are him/his and I am an illustrator in primarily kids’ literature, and an educator. I teach in various programs. I have taught at RISD, in undergrad illustration, where I also attended, and recently in a Master’s program at Holland’s University. This Fall I am teaching at Montserrat College of Art.

HC: How did you get into the world of illustrating?

CD: I had been studying archeology and art history at St. Lawrence University. That led to studio classes and a greater interest in making my own imagery. Around that time I visited my brother at Rhode Island School of Design and found that the level of conversation there was completely different. I applied as a transfer student initially into the architecture department because I had no idea what an illustrator was. But when I got to RISD, I started taking illustration classes, and it was really satisfying. I liked telling stories with images, not particularly for kid lit [kid’s literature]—I just liked being a visual communicator. In my junior year I started freelancing, creating work for newspapers and educational publishers (textbooks). After graduation some of those images caught the attention of an editor in New York. 

HC: That’s a big lucky break. Can you explain more how you got in front of that critical editor?

CD: I did promotion. I sent out mailings and dropped off my portfolio at various publishers. I was very fortunate, because I ended up working with this editor for years.

Our first book together was The Fool of The World and the Flying Ship. That was a breakthrough moment. It was daunting, because the illustrator who had created a version of the story a few years prior had won a Caldecott Award. My version also got a good amount of attention. It got  starred reviews. I did interviews and book signings. But it didn’t sell many copies. The upside of good press but not a lot of sales was that was it allowed me to continue to work in “relative obscurity.” If The Fool of the World had been a huge financial success, and I had felt compelled to reproduce it, it could have been disastrous. Creative endeavors are challenging, but when they change because of the financial piece, it can change your relationship with the creative process. If you’re not connected with the work, but you’re making money, that can be challenging. 

HC: For a lot of creative people with amazing careers like yours, there is a Critical Moment. Can you talk more about how that happened for you?

CD: A part of it was luck, which is always nice. But I was ready. I was ready to take advantage of that opportunity. I had developed a practice and a discipline, so when opportunity arose, I could capitalize on it. I diversified my workflow so I could take on a project that was more time-consuming and less profitable. [It allowed me to] Be ready for an interesting opportunity. 

That led to me being introduced to Brian Jacques, the author of the Redwall series. He wrote a picture book for me to illustrate. It offered me another chance to grow my work artistically. 

In regard to the financial part—I was being paid more, so [ironically] I paid less attention to the business side of things. I was single, with no family, so I could do that. One thing I did do, against the advice of some family members, was invest in buying a house, which turned out to be a good decision. But I was working all the time and lacked balance. 

Having a successful career in the arts is not a static goal. It’s not something that you “achieve.” You develop a practice. Something that Sunlight Tax articles and Money Bootcamp talks have highlighted that resonated with me is that getting on top of your money is also a practice. Financial literacy is not just a tool that fixes things, it is a structure. My Uncle Frank used to tell this joke, “I bought this trunk organizer. I threw it the trunk two weeks ago, and damn if I looked in there yesterday, and this whole thing is still a mess.” So, in other words, you have to actively apply sound financial practices to your creative life. 

A practice builds empowerment, and as a result, freedom. Who doesn’t want freedom in their life? It allows time to focus on what gives you purpose in life. That looks like many things: a chance to support causes and people you believe in, a chance to spend more time with friends and family, and a chance to produce non-commercial work.

A career in Illustration is not a sprint, but a marathon. You need a structure. You need to a map that breaks the steps in the journey down so you know what to do, and when. It makes everything feel a lot more achievable. And it helps you get back on track if you go off in the weeds.

In the past, I would approach my project and finances without the map—I would barrel into the work and block out the rest of my life. I would get paid, and then retire all my debt. That felt great for about a week after I had finished. But that was fleeting, because new bills would arise, and a new cycle would start again. This led to both artistic and financial burnout.

HC: Something I see in so many of my Money Bootcamp members is that one of the key things that money allows is the space to rest. Can you talk about this idea of hustle vs. rest?

CD: A family will force you to take breaks from work! I’m married to a writer, so we do a lot of balancing. In the past I felt as though if I was not working, I was not working at being paid. That was frightening, because projects were long, and there was no sense of where I was financially. 

Now that I have more structure, I feel more comfortable taking some time off. I’ve become more efficient. When I get to the studio it’s “go time.” I know why I’m there, and what I'm supposed to be working on. I allow for mistakes. I can do that because I have a production schedule.

I have a few friends who are 8-10 years my senior, and are top-level character designs for animation. They warned me about burnout and that definitely caused me to pump the brakes a bit. I love illustration too much to let that happen. Nevertheless, I made some bad decisions, like passing up a trip to go back to Ireland to visit with family friends because I was on a deadline. When we had kids, I didn't want to miss that time. So much so that I took some capital from a book that did well, and built a studio here on my property, so I could be around. That allowed me more time with the kids but also forced me to really structure and balance my time.

So much of the world now [because of Covid and working from home] is getting a glimpse into that kind of balance.

Now when I’m having a good painting day, when there is flow, I’m ready. It’s a funny thing though—everyone develops their own studio practice. In the past, if someone said, “you have to do it this way,” there’s a pretty good chance I wouldn’t do it. But if they engage me and ask, “Here’s a project, how do you want to approach it?” then I’m all in. I’m independent or maybe just stubborn!

HC: A lot of creative worlds have their own unique and unspoken assumptions. Grant Conversano, a filmmaker in Money Bootcamp, was describing in a recent interview the unspoken codes they felt in the filmmaking world. Are there codes like this in the illustrating world?

CD: Yes. That you should get an agent. That’s how you get better contracts and get seen. I did not take that route for fifteen years of my career. I met independently with publishers and negotiated my own contracts. This was helpful in some ways—I knew what I was getting into.
It used to be that you sent out postcards, got in touch with people, and dropped off your portfolio. That aspect of the business is so different now. Within an afternoon you can get your website up and running and out there. Because of that, the market is flooded. There are so many people with so much fantastic work. This has democratized things, which is great. In the past, you had to be able to print postcards, have a decent-looking professional portfolio, and get yourself to New York City on a regular basis. That’s all changed now. 

I’ve found that in today’s publishing market, it is helpful having an agent. It allows me to focus more on the creative part, and less on the hustle. Anika (my wife and collaborator) and I share the same agent. Our relationship with our agent Emily Van Beek at Folio is a partnership and friendship. We know from experience that we’re in good hands, and that she’s got our back. She vets projects before they come to me. It helps.

HC: Do you have any advice for a young illustrator starting out?

CD: Instagram is amazing to get your work seen. My general advice is not that different [from how it would have been when I started]. Show work that you are excited about. Work that you’d be excited to do. Don’t show your potential clients what you think they will like, especially if you didn’t like doing it. Be true to your work and eventually you will find an audience. I’ve seen it happen. 

On the business side, besides showing work you can stand behind, there is a question that I always ask my students, “What is the one factor that might inhibit your Illustration career?”

When I ask my students, I get many answers. But the real answer is debt. Debt will keep you from taking those jobs that might pay less but be really good for your work. Debt can lock you in a place of fear and anxiety. It literally shuts down your creative side. I also talk about sleep.

HC: Amen! I thought is was all about money, and now I realize it’s about rest.

CD: Over the past few years I have become fascinated with neuroscience, creativity, and sleep. I want to make the most out of my time, and out of my life. Having a good work-life balance, running, exercising, getting enough rest, etc. is all good for my creative process. 

It was Ariana Huffington’s book on sleep that really got me thinking about this. She’s an amazing thinker and aggregator of information. She had gotten to the point where she’d convinced herself that she could exist as a creative person on four hours sleep a night, and it brought her to a breaking point-literally. She turned her focus to assessing her habits and where they’d gotten her, and wound up creating an amazing book. Another great resource, not on sleep specifically, but on creativity and finding stillness is David Lynch’s Catching the Big Fish. The audio edition is brilliant.

Teaching also helps me find balance by changing my headspace. That’s actually why I teach. Financially, teaching is not a big part of it, but in teaching you are learning. You have to approach someone else's artwork from a different perspective. Every time I teach, I come back to the studio a better artist for the experience. In fact, I just saw a quote pop into my inbox this morning from Gretchen Rubin quoting Octavia Butler “as habit is more dependable, continued learning is more dependable than talent.”

HC: Christopher, this has been wonderful. Thanks for sharing so much about your journey. It’s inspiring to hear the whole arc of it, and how you would advise a younger person in your field. Is there anything you have coming up that you want to share with everyone?

CD: Thank you. I have a book coming out in March. I’ve illustrated over 25 books, but this is the first one I've written and illustrated. It’s called Knight Owl. 

I Like Your Work Podcast: An Artist's Journey from Money Shame to Accounting Magic

In one of four new mini episodes of the I Like Your Work Podcast, I talk about my journey as a painter who had miserable experiences with accountants when I was starting out. So how did I decide to become one? I share the origin story of Sunlight Tax and talk about how the magic and love of the artist community was the right motivation to build a business that serves artists with the tax education they need.

Visit www.sunlighttax.com/moneybootcamp and use the code ILYWMONEYSQUAD to get exclusive access to the free community I Like Your Work Money Squad. The I Like Your Work Money Squad is only available to listeners when they join Money Bootcamp and is a free support group for artists that includes monthly emails and a private Slack channel that will help keep you motivated and accountable.