The Artist as Entrepreneur |
Good
News and Bad News: Income and Taxes
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Lesson Description
It is important for high school students to have an awareness of income taxes, not only to better their knowledge of the government goods and services that are funded by taxes, but also to build their knowledge of personal income tax filing and payment. In this lesson, students will examine Internal Revenue Service (IRS) Form 1040, citing particular line items that are pertinent to an artist acting as an entrepreneur. They will also learn about various sources of income and the importance of keeping accurate income records. Concepts
Related Subject Areas
Objectives Students will:
Materials Procedure 1. Explain that income taxes are considered by many to be a necessary evil. Taxes are mandatory payments made by citizens and residents to the government that then provides goods and services that benefit all citizens. However, reporting income and expenses on tax forms to determine the amount of taxes owed is a cumbersome procedure. And, of course, people frequently complain about the amount of tax they must pay. 2. Explain that when George Harrison was with The Beatles, he wrote and sang a song that expressed his displeasure with the income tax structure in England. Recite the following quote from George Harrison, and ask students what percentage rate of taxation is implied. (95 percent)
3. Display Visual 1, Taxman by George Harrison, and check for student understanding of Harrison’s complaint. (Students should note further reference to the 95 percent rate of taxation.) 4. Explain that although Harrison’s views are shared by many, citizens receive goods and services in return for the taxes they pay. Taxes pay for national defense, roads and bridges, education, research and development of drugs and treatments, aid to disadvantaged people, and many other goods and services. This is especially true in England where the government pays significant portions of education and health care costs. At the time of this writing, British university students are protesting the government’s proposal to have students pay a portion of their university costs. Up until now (December 2003), university students in England pay no portion of their higher education expenses. 5. Display Visual 2, Who Needs to File Tax Returns? and explain that citizens and residents of the United States who earn above a certain dollar amount in income, must pay taxes. Assist students in understanding the table. Note that people working part time, such as many students, may not make the minimum gross income required for filing. However, it is still important to file a return if taxes have been deducted from the part-time worker’s paycheck. Workers who have paid taxes through payroll deductions and have not earned the minimum gross income are due a refund of all taxes collected. 6. Explain that self-employed persons, such as sole proprietors, independent contractors, and anyone receiving fees for services rendered, are required to file a return if net earnings from self-employment are $400 or more. 7. Explain that people can have various sources of income. Income is money received. It can come in many forms, such as gifts or interest payments, but for most people, income comes from work performed. All income must be reported to the Internal Revenue Service (IRS), even prizes, awards and gambling winnings, including the lottery. Some interest income might not be taxable, but it must be reported. 8. Explain that for most people, filing taxes is an annual event. However, for those in business, taxes are often paid quarterly. In either case, the process can involve several different reporting forms. In general, tax returns report a person’s income and the deductions for which he or she is eligible. Sometimes people make mistakes when reporting their deductions. In the case of people operating a business, mistakes can be made when reporting expenses. In many cases, the IRS will audit tax returns and find these mistakes. When they do, the taxpayer must pay the taxes due, often with interest. Sometimes a penalty will apply; however, mistakes in the areas of deductions and expenses are somewhat common and easily made. 9. Point out that making a mistake when reporting income is another matter. Calculating deductions and expenses can be confusing. However, calculating income is a simple process. All money received is income. There aren’t many excuses one can offer for not providing an accurate report. 10. Explain that maintaining proper records of income is important for tax preparation. The procedure does not have to be complicated. Most artists use the Cash Method of accounting. In this method, the artist includes income actually received during the year and deducts expenses paid in that year. Basically, it can be as easy as maintaining a check register. 11. Display Visual 3, Sales and Cash Receipt. Note that the format can be simple, but should state when the payment was made, from whom the payment was received, the amount of the payment, and the good or service provided for the payment. Invoices, contracts, copies of checks, bank deposit slips, W-2 Forms, and 1099 Forms will probably make up your income paper trail. 12. Distribute Form 1040 and explain that the typical artist files the Form 1040, known as the “long form.” In addition to completing the front and back of that form, they might complete other forms for reporting income or expenses related to the business. Draw students’ attention to the various components of the form as follows.
13. Point out the following tips for artists.
14. Explain that while the regulations in effect now are likely to change by the time students are filing their taxes. Although tax codes change, it seems they never become easier to understand, so many artist entrepreneurs hire someone to prepare their taxes. However, even those who have their taxes done by professionals should be aware of the various business and personal deductions and credits. Closure Ask the following questions. Allow students to refer to the 1040 form to aid in their responses.
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