Tax Tips & Tricks For Professional Dungeon Masters
Disclaimer: This interview does not constitute written tax advice and is intended as general information only.
Your situation may be different - you'll want to consult a tax professional for the best and more accurate information for your situation.
Making a living playing Dungeons & Dragons sounds like a dream, and it often feels like one when you’ve got great support! Then tax season comes around, and suddenly the reality kicks in. There’s no W-2 to make things easy, you’re a self-employed individual now. Or would you be better off as a business? Can you write off your dice and energy drinks? Does your small corner of the living room count as a home office? We’re just as confused as you are, so we asked self-employment tax expert Liz Hanley for her sage advice.
With a background in finance and the arts, Liz saw a profound need in her community and decided to make a career of helping small- and medium-sized businesses grow. She loves the opportunity to work with a diverse client base with unique challenges. For more than a decade, her Liz is All Biz team has grown to support clients in deeply specialized industries all over the country. Learn more about LIAB and their services here.
StartPlaying: If you’re self-employed, what’s the rate that you should expect to be paying in federal taxes?
Liz Hanley: We have a progressive tax system, so it depends on what your total income is. The tax rates go all the way from 0% to 10%, all the way up to 37%. So it really depends on what your bracket is. So for most people it’s three taxes: federal income tax at whatever bracket you are, state income tax where those brackets are usually smaller windows, and then federally you will pay self-employment tax which works out to be about 12.5%. So it can be pretty significant. You can imagine as you get to those higher brackets we’re looking at 40% in just federal taxes.
SP: Could you tell us what the brackets are and what that income is related to?
Liz: I would actually have you Google it, as the brackets change every year. It also depends if you are single, married, if you have any dependents. Usually they use your total income, so that would be W-2, 1099s, investment income, stuff like that is all going to go into figuring out which bracket it is.
SP: Are there good calculators out there that can help you figure out “I should save this much”?
Liz: Unfortunately, taxes aren’t that simple. So basically, what I would tell folks is that you have to estimate what you’ll make, and what bracket you’ll be in. Once you have that number, then you can kind of do the math. So you factor in that bracket, and then add self-employment tax to that.
SP: Then, on top of all that, you want to write something off.
Liz: Well then, how it works is we kind of get into that income number that is in your bracket. So what that’s based on is your net income. For our conversation, thinking about Pro GM (sic) business, StartPlaying (sic) gives them a 1099-K for the total amount they make, their gross. And then what will happen is, they write off their deductions after that. So income minus deductions will be the net. The net is what actually goes into the tax calculation, not the gross.
SP: We have some things our GMs have wondered if they can write off. Many run adventures from a published book. Is that a write-off?
Liz: It should be. So here’s kind of like a rule of thumb. Some of the stuff we’re talking about, there aren’t IRS guidelines for this, so it’s about the spirit of the law. First is expenses that you are incurring, that you wouldn’t incur if this wasn’t your job. So if you weren’t going to buy that series, if you weren’t going to run an adventure on it, that seems like a good candidate for expense. The other thing that I always say is “Do you think you could say to an IRS auditor with a straight face that it is in fact a work expense?” If it can’t even pass that test, don’t do it.
SP: What can someone expect if they wrote off $500 of supplies, and the IRS says “Hey this isn’t okay”? What are the consequences? Is there a penalty?
Liz: They would probably have to provide receipts, and then they would have to explain why they were supplies. If the IRS denies it, you can appeal if you want. In terms of consequences, it depends on if they think you’re being malicious. If it’s like “Oh they’re just a ding dong and they didn’t know that was a thing,” then they’ll just add that much into your income and you’re gonna pay tax on it. If they think it’s a substantial overstatement of expense or they think you’re trying to do fraud, expect a fine.
SP: People that Pro DM/GM, they’re doing it out of a home office. Does that give them the home office write-off?
Liz: Yes, probably. The home office can be an amazing write-off. There’s two really important words that you want to remember when you’re doing that. The IRS test for home office has to be “regular use” and “exclusive use”. You have to be only doing your work in there. That can be difficult, so sometimes what I would say is use part of your space just for work. If you feel real nervous or paranoid about it, take pictures. I’ve had folks in many industries come to me and be like “Liz, my home office is 60% percent of my apartment,” and I’m like “Really, are you sure?”
Sometimes it legit is, and I’ll just be like “Well, here’s the thing: that seems weird.” So what I want you to do is take pictures of the whole thing so when we get that love letter, that’s what we will respond with.
SP: What about internet and phone?
Liz: A portion of it. So, again, it’s like my straight face to the auditor. I’m sure that you probably use your internet and phone for other things in your life, so you’d have them even if you weren’t doing this job. So what I would say is do whatever percentage seems reasonable. So long as you can show your thoughts as to why you chose that, and come to them with a reasonable situation, they’re usually going to let it slide.
SP: One of our GMs asks, “Should I separate my Dungeon Master income from separate profits generated from merchandise?”
Liz: Depends. If it’s significant enough income in either space you might want to split them out into two businesses, or if you might want to track them separately. It seems like these two are kind of related so they could be together in the same business.
SP: What is a significant amount? Is it like $10,000?
Liz: It’s subjective, but significant enough to be worth the trouble to track separately. Some people are like “$100,000, there’s no way I’m doing another spreadsheet!” Some people are like “I will do it for $7,000.”
SP: How much would you need to be making a year to make it worthwhile to register as your own LLC?
Liz: Well, an LLC is really about liability protection. It doesn’t have a huge tax advantage to just be real honest. Let’s say you’re in California, the only kind of tax implication is you get the pleasure of paying the state of California $800 to be an LLC. An LLC is more of a legal device, so I would say when you get to a point that’s significant for you that you want to separate your business from your personal. That number’s going to be different depending on what your split is.
SP: Any tips or tricks for people who do want to file under an LLC as opposed to individually?
Liz: The first thing is that it’s not a thing. So if you’re saying you’re an LLC, I will just start you right off by saying the IRS has a special phrase for ignoring that. They call it “disregarded entity.” So I know in your mind you see it as separate, but the IRS does not see it. So there’s no tricks, because it doesn’t exist.
SP: Are there other types of business (like S Corp, Inc., etc.) that are more in line for someone who is a service provider?
Liz: I think what people are usually asking about when they ask this is basically “Is there a tax advantage to doing it this way?” And I would say that definitely there can be for a service-based business. I’m assuming most Pro GMs (sic) are not partnerships but one person. So there are two options that would be open to them: there would be an S Corporation and a C Corporation.
An S Corporation can be really helpful. It can help you lessen self-employment tax, which I will say at 12.5% is pretty significant. If any of your folks went and did their taxes this last year, they’ll notice their effective tax rate is quite high. That’s why people are often interested in an S Corporation. But I will say that it does come with a lot of work–there’s a separate tax return, you have to set up a payroll service. At this point you’re usually working with an accountant, as very few people can manage that complexity successfully.
SP: What is one thing that you think most people who are self-employed aren’t doing that they should be doing?
Liz: Retirement. If you’re working for yourself, you’re probably like most people that I know. They’re younger, they’re not contributing very much of anything to their retirement. This is why I think they should consider it: compound interest is your friend. Just a little bit now can help you out.
Secondly, let’s say you get to the end of the year, and we’re talking about those tax brackets, and you’re like “Oh man, I goofed up and overshot it by $8,000 and now I owe 10% more.” Guess what? You can still bring it down by putting money into your retirement. If you are self-employed, you have access to something called a SEP-IRA. There’s two things that are really awesome about it. One is that you can put in up to 20% of your net earnings up to $52-$53,000. So you can stock some cash away.
But that’s not even the coolest part. This is my tips & tricks. Let’s say you’re even on extension and you’re like “If this income was $8,000 lower, I could pay less in taxes.” In a SEP-IRA, you have to fund it, but when you file your taxes or the extension deadline (which is in October), it counts for the previous year to get that lower tax rate.
This happened to a couple people that I knew that had online businesses. They had a really significantly better year because the whole world went online last year. When we got to the end, I came to them with big numbers. I was like “If you could put $22,000 in your SEP, I could save you $30,000/$40,000 in taxes.” But they’re like, “I don’t have that, Liz, nor do I have the other amount in taxes.” So I said, “Make a partial payment, put everything on extension, you have until October to fund it.”
SP: Anything else that self-employed people could utilize?
Liz: The other thing you can use, and this is a financial and wellbeing thing, is that you can actually write off your health insurance premiums. That goes directly into your net income so that can be really helpful.
SP: Is there something people never write off that they should?
Liz: The one thing that I would say for my folks who do unusual things, is they presuppose things they can write off and that they can’t. Please tell your tax preparer about all the expenses you have incurred in your work that you wouldn’t have if you didn’t have that job. So what happens is a lot of people basically edit them for me because they’re like “There’s no way that could be an expense.” And here’s the thing, your tax person could say “No, actually we can’t do that,” but don’t make those decisions for them. I’ve written off all sorts of really, really wild things.
Two years ago, I work a lot in the music space, my top two were a baby monkey rental as marketing and $6,000 worth of ammunition from a Walmart for a metal cover.
SP: Is there anything you think we missed that self-employed people should cover?
Liz: The one thing I feel like you didn’t talk about that people should think about is separating out your expenses and loosely tracking them throughout the year. One of the ways you can do that is to put it in a second bank account, like you could have two personal bank accounts and have all your expenses come out of the one so you don’t have to go looking for them at the end of the year.
The other thing is having a sense of where you are as you go through the year of what that net is. We talked a lot about the idea of brackets, and that is so crucial because some of those jumps are huge. So if you don’t know what your gross is or even just roughly what those expenses are, you’re flying blind throughout the whole thing.
Thanks so much to Liz Hanley for fielding all our questions and helping to demystify the arcane art of taxes. Remember to hold onto those game store receipts and start tracking expenses, dear reader. And start planning for retirement, even if you intend to be DMing well into old age.