Calculating Net Profit After Taxes and Surcharges

A simple formula to account for the costs of doing business
Gross = Net/(1-Charges)

If you are selling your work—and especially if you are selling your work without representation by a gallery or agent—you have probably found yourself scrambling to price your product, often with short notice, to capture a sale. You've probably also realized afterward that you didn't take into account the overhead costs associated with that sale. Have you found yourself scribbling on scrap paper trying, with your pidgin math, to ricochet numbers off a price until you hear the mental "ding" of estimated tax coverage? There's a better, simpler way.

Setting a base price is difficult enough: You have to assess the state of the market, your relationships with potential collectors, your sales and exhibition/performance history, your volume of output and perceived demand. Then comes a patron. He or she wants to purchase a painting, a script, a performance. You "run the numbers" which, for most creatives, means you worry about it for a while. A number floats into focus. Maybe you niggle with it, discounting yourself out of insecurity or haste because you want the sale. You make an offer. The patron agrees. You get, let's say, $1,000 for your work. You are happy: you just made one thousand shiny new dollars.

Except you really made about $700. And, if they paid by Square or Paypal or a credit card, more like $670. Did you throw in a ten-percent discount? Now you are closer to $600. As a retailer of your own work (did you remember sales tax?), you have to master the relationship between gross—the amount of income you receive—and net—the profit left after overhead fees have been subtracted. This relationship is governed by the tax—the fees, surcharges and costs of doing business that affect your bottom line.

Negotiations aside, when you set your price you are offering the gross price and anticipating the net income. Any financial charges—tax, bank processing fees—are coming out of that gross sum. If you are self-employed as a sole-proprietorship (your default status as a practicing artist) or sole-proprietor LLC, you are probably paying around 30 percent of that gross income as taxes. Paypal will take around 2.9% plus $0.30 per transaction, Square 2.75%. For a more professional online POS (point-of-sale system), Shopify charges from two percent plus a monthly fee. Processing credit cards through a payment gateway like Authorize.net generally incur fees of three-to-four percent on top of the gateway's monthly fees.

It's enough to leave you feeling desperate. There are many things to master in the business of making art, but one simple formula can protect you from yourself and normalize your actual income with your expectations of income. The formula below is one to memorize. It allows you to calculate what to charge a customer based on how much you want to make. You will find yourself using it constantly as you price your work, your performances, your ticket prices, your billable hours.

GROSS = NET/(1-TAX)

Let NET be your desired net earnings, and let TAX be the total of all taxes and surcharges. You have to GROSS the following so that you have NET remaining after all taxes and fees are taken out:

Let's say you want to net $10,000 and all of your surcharges total 34%. You'd have to gross over $15,000 to get the profit you want: 10,000/(1-0.34) = 10,000/(0.66) = 15,151.52

Accounting for $5,151.52—the total of the taxes and surcharges in the above example—when setting prices on your work drastically increases your bottom line and saves you headaches during tax season. This formula also shines a bright light on that dark feeling that you are working and working and working and the money's just not there. You probably haven't been considering the true cost of making and selling work. Add this formula to the "notes" app on your phone or write it on your studio wall. Having it handy and/or visible serves as a reminder and motivator to set a fair price ... a price that's fair to yourself.

JC Steinbrunner is the editor of Chicago Artists Resource, a painter and founder of The Salon Series, a social- and discussion-based curatorial project that emphasizes participation between guests and artists to explore meaning, context and craft of new work.

Published by CAR_Editor on Wed, 05/08/2013 - 9:40am
Updated on Tue, 01/28/2014 - 12:26pm