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It’s tax season. Doing taxes is not the most exciting thing in the world, especially if you’re preparing them yourself. But if you plan your business with taxes in mind, you can maximize your deductions for a handsome tax return year after year. As an independent artist, you might consider yourself self-employed or you may classify your music as a side hustle. Whatever the case may be, keeping track of your expenses and income will benefit you in the long run especially when it comes to filing taxes. This article will discuss tax tips and common deductions musicians should consider when filing taxes.
Should I report my music earnings? If so, what forms should I use?
The short answer is yes. Income is income whether it’s considered a hobby or a business pursuit. Therefore, it should be reported. The only difference is where it’s reported on your filing. If you’re conducting music activities as a business, you would claim your income on Form 1040 Schedule C for sole proprietors or Form 1065/Schedule K-1 or Form 1040/Schedule E for bands. If you’re a hobbyist, you would claim income as a line item on your federal tax return. There are many benefits to reporting income. One huge benefit is that you’ll have less anxiety about getting penalized for not reporting your income. Another benefit is that you’ll be paying into the social security system which will benefit you when you get older. This is assuming you think the social security system will still be around by then.
It's tax season! Musicians, are you ready to file taxes? What are your favorite tax tips? Mine is to run your business accounting with tax regulations in mind throughout the year. That way, when it's time to file, you'll be prepared.
— The Crafty Musician (@IndieArtistsDIY) February 20, 2019
Do I need forms from any of the venues I perform at?
A venue is required to submit a 1099 MISC form to the IRS for every person they compensate if the amount is $600 or more over the course of the tax year. They are letting the IRS know that they paid you. You need to make sure these amounts are reported on your tax return. This information is typically reported on Schedule C. However, this could be different based on your individual tax situation. Check out the IRS official instructions on reporting income from 1099s.
Should I Pay Quarterly Estimated Taxes?
If you owe more than $1000 after your tax filing you are required to start paying estimated taxes in the following year. If you expect to owe more than $1000 for the tax year, you probably should consider paying estimated taxes. The idea behind this requirement is to make tax payments easier to cover if it’s spread out throughout the year. See IRS requirements for paying and calculating estimated taxes here.
Am I operating as a Business or a Hobbyist?
As mentioned above, it’s imperative to know whether you’re doing business or pursuing a hobby. The IRS makes a distinction between the two because the tax implications are quite different. As a business, you can deduct expenses even if those expenses exceed your earnings. However, if you’re a hobbyist, you’re not so lucky. Any expenses incurred beyond your earnings can not be deducted. If you classify your music activities as a business, then you should be prepared to prove that you are in a legitimate business and that you are regularly doing such business. A great way to prove this is to show expenses such as advertising costs and professional printing costs from business cards, posters, flyers. You should be able to demonstrate that you’re actively pursuing gigging opportunities throughout the year. You should also have a separate bank, credit card, and debit card specifically for music transactions. By the way, I recommend using travel reward credit cards to get the biggest bang for your buck. You’ll get points to use toward flights and hotel stays simply for spending what you would normally spend. We booked an entire vacation to the Florida Keys for free just by using travel reward cards. Use my link here and we both win! Sign up for a business credit card with Chase, and you’ll get a bonus reward of up to 80,000 a $1,000 value.
What deductions can I take?
The first thing to consider when taking deductions is looking at your expenses. How are you investing back into your business? Most of these expenses can be deducted. Expenses like instrument purchases, rental, and repair, booking personnel fees and commissions, professional books and magazine subscriptions, credit card processing fees, association fees, business cards, printing fees, advertising costs, studio time, rehearsal time, and generally any ordinary and necessary expense associated with business flow. As a self-employed individual you may also be able to take health insurance and home office deductions.
Other expenses include toll bridge fees, parking costs, meals (50%), gas, mileage, and lodging associated with touring. Gas, mileage, and lodging expenses would fall under the Business Travel category. Be sure to include meals while on tour in a separate category as you can only deduct 50% from this category. One other important factor is that the IRS has strict requirements regarding what constitutes a ‘tour.’ Specifically, business expenses can only be deducted when your trip involves sleeping over somewhere. A quick and easy guideline to follow is that you should only take business travel deductions if you also have lodging expenses associated with that trip. Be sure to review the official business travel deduction requirements outlined by the IRS before taking these deductions.
Mileage is a huge category to deduct expenses! Be sure to keep detailed records of your mileage so you can report miles traveled every year. If you’re not reporting your mileage and you’re a traveling musician of any kind, you’re missing out on a serious payday. This is especially true if you’re a touring musician. Tracking mileage is simple. All you need to do is record your odometer readings at the start of your trip and after along with the date. That’s it! Keep a tally of this for the entire year. If you’re looking for an easy way to track your mileage, check out A Mileage Log Book for Musicians.
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Recommended Book:
A Mileage Log Book for Musicians
Whether touring regionally or internationally, this log book can help musicians keep track of distances traveled from day to day. Don’t try to keep track of mileage and tour expenses all in your head or on random sheets of paper. Track your touring activities all in one place, the Mileage Log Book for Touring Musicians!
You must keep track of all of these expenses and keep copies of bills, invoices, and receipts. If you have a limited amount of space like me, scanned copies of receipts are acceptable. See the image below for a guideline of how to separate and categorize business expenses. This is a screenshot from TurboTax, a tax filing software.
By the way, TurboTax is a great option to use if you’re filing taxes on your own. They walk you through each line item and expense. Plus, they categorize everything for you. They fill out the forms for you, all you have to do is answer questions! In addition, TurboTax searches for available tax credits and deductions you can take advantage of automatically. It’s a super easy to use system. Use my link here, and get 20% off if you select a premium tax filing service.
What are the requirements to claim my ‘home office’ as a deduction?
As a musician, your main place of business will probably be on the road, cafes, coffee shops, and on stage. But if you are filing your music activities as a business, you can also claim a ‘home office’ since you work from home. As long as it’s a dedicated space used exclusively for doing business. There is plenty business to be done at home. For example, booking efforts, show promotions, show advancing, social media maintenance, accounting, and other tasks can be done in your home office and you should claim it! Take a look at the official rules for claiming a home office here.
How will I Keep Track of My Income and Expenses?
You need to have a system to keep track of your expenses as well as your earnings. Maintaining detailed records of your business transactions will help you keep an eye on how your business is doing financially throughout the year. Plus, when it’s time for taxes you’ll be able to plug in your earnings and expenses more easily. Don’t wait until it’s time to prepare and file your taxes to organize this. You’ll save yourself a lot of stress and time if you do it throughout the year. I recommend using either a Quickbooks or a Google spreadsheet to get organized. Every time you make a sale or get paid from performing log it in your accounting system. Every time you make an expense, log it. It’s a good idea to log all expenses including the ones that you’re not allowed to deduct. Such as gas for an in-town gig. Sometimes you might have to travel 30 minutes to get to a gig, yet based on current tax requirements, you can’t deduct it because it’s considered an at-home expense. So, be sure to include all expenses, but make sure that all taxable expenses are identified clearly. This will make it much easier for you when it’s time to file.
+Finance 101 For Musicians: A Basic Finance Guide for Musicians
+How to Make Money as a Musician Without Touring
+How to Prepare a Profit and Loss Statement for Musicians
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Do you know how to prepare a Profit and Loss Statement? A Profit and Loss Statement (P&L) is a detailed account of all of your business expenses separated by category and all your earnings over a certain period. These earnings and expenses are then calculated to show what your net earnings are for that time period. Net earnings are what you get to keep after subtracting expenses. This information is good to have for applying for things such as government health care and other income-based programs, loans, housing agreements, etc. This information is also good for creating a cheat sheet of your expenses and income for tax reporting purposes. If you categorize your earnings and expenses based on accepted tax categories, you’ll be able to pull the numbers from your P&L Statement directly into your tax return in less than 5 minutes. How’s that for easy, stress-free tax filing?
As musicians, it’s in our best interest to know a little more about taxes than the average Joe. Since we’re responsible for our own tax withholding and payments, we should be super diligent in making sure we’re maintaining accurate records on every business transaction and reporting that to the IRS. We should also be knowledgeable about tax requirements and laws as it pertains to running our business. With these tips and a little preparation, you’ll be able to handle taxes like a pro.
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Disclaimer: The author of this article is not a certified accountant or tax expert. Any information found in this article should be confirmed with the IRS before applying to your personal situation. Due to the complex nature of tax requirements, we recommend seeking the aid of a professional tax preparer when filing taxes. ThesetaxtipsareprimarilyforpeoplelivingintheUnitedStates.
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