Tips from an Accountant: The Best Way for Musicians to Do Their Taxes
Bookkeeping Everett WA
Emily Kingan is known in the music world as the drummer for Lovers and singer/guitarist for homocore band The Haggard. Her bands have toured the world, spreading empowering feminist messages to fans for years. Around Portland, Oregon she is also known as a lifesaver for artists and musicians when it comes time to file taxes. Kingan is an enrolled agent with the IRS and a licensed tax consultant in the state of Oregon. She also has her bachelor’s degree in mathematics from Reed College. Her company, Math LLC, provides tax preparation, accounting services, and financial consulting for individuals and small businesses. Kingan specializes in serving working artists and musicians and has first-hand knowledge of how to best serve their financial needs. Tom Tom got down to business in the following interview to explore the sometimes overwhelming details of finances with Kingan.
Tom Tom: What percent of their income does an individual have to earn through music to file taxes as a musician? Kingan: If you are playing shows and/or selling your music, chances are you are required to report your music income on your tax return. According to the IRS, if you earn $400 or more, you are required to report it as “self-employment” income on a form called a schedule C, which you attach to your federal tax return. You will report your income and your related expenses on the schedule C. The good news is that musicians tend to have a lot of expenses associated with writing, recording, touring, and performing their music, and you only pay taxes on your profit (i.e. your income minus your expenses).
Is it legit to keep some show and merchandise earnings “under the table?” At what point should you start tracking that as taxable income? What is the best way to keep track of this? As a licensed tax consultant, I cannot advise to keep any earnings “under the table.” All income must be reported. If you make less than $400, you would report it on line 21 of your form 1040. If you make $400 or more, you would report that on a schedule C. If you were audited by the IRS or state government, they will take a look at all your trackable income on bank statements, Square, Paypal, etc. You should also be prepared to explain how you track cash. If there is a discrepancy between your income calculated by the IRS, and what you reported on your tax return, you may face penalties and fees.
As far as tracking your income and expenses, I recommend opening a dedicated bank account for your music business and running all income and expenses through that account. At the end of the year, it simplifies the process to figure your total income and parse out your expenses when they are localized to one account. I have also seen people use spreadsheets or logbooks to track income and expenses. Quickbooks is useful too, but there can be a steep learning curve with learning that software.
What are the pros and cons of establishing an LLC for your band? At what point should a musician start thinking about that? When it comes to taxes, there are no direct benefits to being an established LLC. However, establishing an LLC now can save you money and lots of energy down the line if your business grows and you decide to incorporate. You may consider incorporating if you anticipate making a profit of $30,000 or more within the current tax year and future years to come. Remember that your profit is your income after subtracting expenses. The cost of establishing and maintaining an LLC is about $100–$200 per year, depending on the state.
Lola WK Lola WK Can a drummer write off expenses related to their music if most of their income is made through non-music related means? This can be tricky! My recommendation is to only write-off music-related expenses against music-related income. For example, if you bought a drum set, write it off against the money earned playing shows, rather than the money earned at your non-music related day job. The IRS pays special attention to income and expenses related to creative pursuits, such as musicians, photographers, and writers. They may consider these to be hobbies, in which case expenses are not allowed. If you claim music related expenses against zero music related income it will look like you had a business loss.
After three years of losses, the chances of being audited greatly increases. During an audit the IRS will assess if you are legitimately pursuing music professionally. Things that can help legitimize your music career include a website, history of shows and touring, music releases, and established business bank account and/or LLC. If you accumulate a lot of music related expenses in a year without any music related income, do not fear! In a year that you do make some money playing music, you have the option of writing-off those previous expenses as “start-up costs.” Definitely track your music expenses and keep your receipts because they can really help you in a year where you earn the big bucks!
Can an individual group together music and art-related earnings as one self-employment position? Yes, in this case you would call yourself simply an “artist.”
Let’s say that I am about to tour as a hired gun for a pretty well known indie artist. How much of my income should I expect to be taken out in taxes? What’s my best approach for filling out the income-related forms they might give me? This depends on whether you will be treated as an employee or an independent contractor. The best deal is to be treated as an employee. In this case your employer will share the tax burden with you, and, generally, you will not owe too much tax at the end of the year since taxes will be withheld from each paycheck throughout the duration of your contract. Your employer will ask you to fill out a W-4 where you will list your exemptions. Exemptions are based on your life circumstances, such as the number of children you have, if you are married, et cetera. If you claim zero exemptions, you will have more money withheld for taxes during each paycheck. Conversely, if you claim one, two, or even three exemptions, less money will be withheld from each paycheck. My advice to filling out the W-4 is to get as close to zero exemptions as possible to avoid having to pay a lot at the end of the year.
If you are hired as an independent contractor, you can expect to pay an average of 25–30 percent tax on your income (this percentage varies depending on your income tax bracket). Your employer will most likely be covering all expenses, leaving you with few expenses. To makeup for this, keep track of your itinerary and claim the per diem meal expense for each travel date (these can really add up! Find the rates at gsa.gov). Also keep track of any other music-related expenses you have during the year, even when you are not under their contract. These can be written off, too.
My friend’s band has started to make a little more money at gigs, about $600–800 a show. If they take turns filling out W-9s at shows, how do they ensure that their tax burden is equal in the end? The most legit way to handle the rising success of a new band is to set up the correct business structure as early as possible. If you and your bandmates are all equal stakeholders in the project, form a partnership or partnership LLC and get a tax ID number for your band. Use your tax ID number on all the W-9s you sign. At the end of the year, you will file a partnership tax return (form 1065) and each band member will receive a K-1. You can write off band expenses on the partnership tax return and personal music-related expenses on your personal return.
If you choose to forgo the partnership formation, another option is to have one band member claim 100 percent of the band revenue and expenses and then share the tax burden with that individual by having the band pay the tax on that income. The risk in this arrangement is for the one holding the financial responsibility, because if the other bandmates bail that person will be stuck with the bill.
Do I have to file a 1099 if I hire musicians for my band? Do I have to file 1099s for my publicist and website manager? The IRS regulations require you to file 1099s to anyone you pay $600 or more within the tax year and who is not a corporation. Be aware that since an LLC can be a sole proprietorship, partnership, or corporation, you will need to clarify if any of the LLCs you hire are incorporated or not.
Lola WK Lola WK My friend is a drummer in a rock band, and they make most of their income through performing music. What kinds of things can they write off? The IRS says you can write off anything “ordinary or necessary” for someone in your line of work. Ask other musicians what they write off for more suggestions. For those who are totally clueless about where to start, here is the short list:
Music equipment Travel expenses: such as transportation, fuel, lodging, etc. Meals and entertainment shared with other industry professionals or while traveling Office supplies A percentage of your cell, internet, and computer (generally 80 percent or less is considered reasonable) Legal and professional services Research: going to shows, buying music, music-related publications Education: such as coaching and lessons Rent: practice space or equipment Contract labor: such as hired musicians Advertising: website, business cards, posters Merchandise Another friend is a drummer who makes most of their income through teaching private students. What kinds of things can they write off? You can write off the same things as written above! I would also add to keep track of your mileage if you teach at a location outside your house. You can also write off a percentage of your rent and utilities as a home office expense if you work from home.
How much does it cost to hire a tax preparer? At what point should a drummer consider hiring one? In a typical musician/artist scenario, would the amount they can save me be worth the additional expense? What kinds of things can they help with? At Math LLC, we charge somewhere in the neighborhood of $200–350 to prepare a tax return for someone who is self-employed. Prices may range depending on what city you live in, and if you go with a CPA, which tends to be more expensive than a licensed tax preparer. If you feel overwhelmed or like there are terms or concepts you do not understand while preparing your own taxes, it is probably better to get help.
I have seen tax preparers save their clients hundreds or sometimes thousands of dollars because they know the tricks of the trade. On the other hand, I have heard from some of my clients that their previous preparer disallowed them legitimate expenses, because they didn’t understand the music business. Most of the tax preparers I know really enjoy saving their clients money. Look for someone who is familiar with your field so that they are knowledgeable about the types of things you can write off. If you find yourself working with a tax preparer that seems like they do not understand you or your business, it would be better to go elsewhere.