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Taxes / Deduct Contract Payouts


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#1 dpadam450   Members   -  Reputation: 856

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Posted 20 July 2013 - 10:02 PM

I'm releasing a game as an individual (no registered company, LLC etc). If I am split 50/50 with an artist, come tax time, how do I take care of this?

Is just keeping track of the money and then submitting some kind of deduction form all I have to do? Essentially I am submitting a game to OUYA soon and they require tax documents. If it reports that they paid me 10,000 but only 5,000 will be income to me, then I'm wondering how/where I tell the government this.



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#2 Hodgman   Moderators   -  Reputation: 28405

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Posted 20 July 2013 - 10:24 PM

Which country/state are you in?

 

Here in Australia, you have to be a company in order to sell stuff. You do this by filling out a short form on the tax office website for free, which gives you a business number immediately.

 

As a guess for how this would work in your situation:

If you're selling the game as an individual (sole proprietorship), then Ouya makes payments to just you. You then pay tax on that full amount (or Ouya pays the tax on your behalf), as it's income into your "company".

Your company then has a secondary expense, of paying royalties to an artist. This is just a usual business expense, and doesn't exempt you from paying the initial taxes.

You  make these payments to the other company (your artist's sole proprietorship), and he pays taxes on his income (so the money going to the artist has essentially been double taxed).

 

Alternatively, the two of you can register a partnership, so that Ouya can pay money into the partnership.



#3 dpadam450   Members   -  Reputation: 856

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Posted 20 July 2013 - 10:36 PM

I'm in the US. Not sure if that double tax exists or not. If I can deduct computers and travel costs (including meals). I would assume I can deduct the price of doing business.

Anyway, someone in the US maybe knows this? Does it just go onto a Schedule C?


Edited by dpadam450, 20 July 2013 - 10:48 PM.


#4 Matias Goldberg   Crossbones+   -  Reputation: 3040

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Posted 20 July 2013 - 11:01 PM

That depends on whether:
a. The artist is a partner of yours or a contractor (considering you're both going 50/50 over royalties only, I'm not a US-law expert but that may better suited as "partner")
b. The artist is in another Country or not.

If he's a partner, then that will heavily depend on how what type of partnership is adopted.
If he's a contractor, then you're going to require at least an invoice (and if possible, a contract too) from him to justify your $5000 in costs so that you can say your income was $5000 and not $10000 (from your example)

If he's from another Country, talk to a tax expert (tax withholding could apply depending on your situation; tax withholding means before you pay him, you have to reserve some of that money to pay US taxes for him). At least you're going to require a signed affidavit from him saying that he's not a US Resident and that the work he performed for you was when he was out of the States.

If you're going 50/50 (or whatever ratio) make sure you're both on the same page and have a written signed agreement to deal with these technicalities. Everything is cool, fun and fine until the unexpected happens and cash starts flowing in.
For example if one has to pay 15% of their income in taxes and another 25%, what does 50/50 mean? Do you both support the same costs? (i.e. act as if both get to pay 20% in taxes?) or one pays 15%, and the other 25%?
Same with bank transfer fees, etc.

#5 Shippou   Members   -  Reputation: 1467

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Posted 21 July 2013 - 04:47 AM

 In the US the income from the sales of games is reported as personal income,  and an IRS 1099, 1042 or 1042-s is used for the royalty payments you give the other person.

 I am not sure which one of the above forums is applicable in your case ... please note I am not  a tax professional.


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#6 frob   Moderators   -  Reputation: 19598

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Posted 21 July 2013 - 11:56 AM

Moving to Business & Law forum.

 

Matias has the best answer above.  

 

It depends a great deal on the circumstances. The results are different if you have established a partnership, employment, or contract relationship.  

 

If you never made the relationship formal (perhaps through a collaboration agreement, incorporation documents, or independent contractor agreement) then the law can get extremely nasty.  In fact, without some of those documents it is improper for you to sell the game since neither you nor the artist have all of the rights.

 

 

You are talking about tens of thousands of dollars, plus much more over time.  You are long overdue to commit the small investment of around $200 to properly set up your business.


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#7 Tom Sloper   Moderators   -  Reputation: 9049

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Posted 21 July 2013 - 12:42 PM


You are long overdue to commit the small investment of around $200 to properly set up your business.

 

Amen to that. You need someone to advise you on your taxes. And you needed to have a Collaboration Agreement in place between you and your partner before you started working together.


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#8 bschmidt1962   Crossbones+   -  Reputation: 1775

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Posted 21 July 2013 - 03:46 PM

 If I am split 50/50 with an artist, come tax time, how do I take care of this?

 

Per  frob and tom's advice, go make an appointment with someone who can walk you through this.  Do it first thing Monday morning smile.png

 

As a bit of background info...

Ouya (or Apple, etc) require that you provide a tax id number.. for an individual, that's a social security number.  That is on a form w-9 that you must provide to them

 

Any money Ouya pays to you is income to you and you will have to report it to the irs when you do your taxes.

If you have an agreement with your artist friend that s/he gets half, then whatever you get from Ouya, you write a check to them for half (after expenses)

Now here's the tricky part.  You need to report to the IRS that you paid your friend that money.  Otherwise you will have to pay tax on it.  There are separate forms for that (form 1099-MISC).

Yes, this goes on your Schedule 'C', as you surmised, along with any other legitimate, direct expense related to the creation or selling of the game.

 

So to sum, it up, if Ouya sends you 10,000 you

Figure out what business costs there were.. say there were 1,000.

Take half of what's left, and write a check to your friend.. 4,500 (half of 9,000)

Fill out the proper forms come tax time-- your net taxable income should be 4,500 ( (10,000 - 1000)/2)

 

Sound tricky?  it can be, which is why you should talk to someone who can walk you through it properly.  In addition, how I described it is only one of several ossible ways of setting things up.  It is VERY worth it to talk to an expert if this is your first time doing it.  It's not rocket science, but if you get something wrong, it can cost a lot of money.

 

Oh--and get the agreement with your artist friend in writing.


Edited by bschmidt1962, 21 July 2013 - 03:52 PM.

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