OVERVIEW AND INCOMES TYPES
Our goal is to keep more money in your pocket come April 15th. The most important point of consideration is to differentiate between two types of income: employment income and self-employment/contract income.[1] For both, you will need to report all income to the IRS, but the tax implications for each type of earning are drastically different.[2]
For income earned as an employee, your employer will send you a wage and tax statement called a W-2.[3] The good news is that if you receive most or all of your income through W-2 employment, you have little extra work to do. When you are paid as an employee, your employer will withhold the necessary income from your paycheck for government costs like federal, state and local taxes, FICA taxes, Social Security, and Medicare.[4] If you earn only W-2 income, you will most likely be able to file using form 1040EZ, which will save you time over the traditional form 1040.
An important consideration if you earn a combination of W-2 and self-employment income/contract income is that the tax amounts withheld by your W-2 employer will not be sufficient, as employers will not incorporate your additional income streams in their withholding calculations.[5] If this is the case, and it will be for most of you, calculate a reasonable estimate of what your withholdings should be, and use form W-4 to inform your employer that you would like additional amounts withheld.
LET’S SAVE YOU SOME MONEY
For all earned income that is classified as self-employment or contract work, you will have the ability to make significant deductions against that income.[6] This will lower your adjusted gross income (AGI) and, therefore, reduce your tax liability. If you plan to itemize these types of business deductions, you must file using form 1040 and include Schedule C, the document in which you will list these deductions.[7]
In order for an expense to be deductible, it must be “ordinary and necessary” for your line of business.[8] For every expense you plan to deduct, you must be able to provide proof of that expense. This can be in the form of clear record-keeping, receipts, credit card statements, or check stubs.[9] An important aspect of this record keeping is to keep careful track of any form 1099-MISC that you receive.[10] These forms are sent by organizations that hire contract workers. Note: you will receive this form only if you earned more than $600 in the calendar year. You are expected to report amounts less than $600 to the IRS on your own.
Now, what can you deduct? You can deduct almost anything that relates to your business as a musician. Please reference this handout as we discuss deduction possibilities.[11] This template is one that you can use to keep track of your deductions, and it lists the applicable categories. Professional accountant Peter Jason Riley advises musicians to consider the following categories[12]: 1) union dues and professional societies, 2) professional fees for agents, attorneys and accountants, 3) professional registries, 4) master classes, festivals, coachings and lessons, 5) stage makeup and hair care,[13] 6) headshots and other professional photographs, 7) resume and other professional document printing/mailing, 8) stationery and postage, 9) music books, scores, sheet music, and any other supplies necessary for your jobs, 10) certain costs for internet and phone (only those related to business), 11) stage clothes, 12) research (this can include concert attendance, and CD or DVD purchase), 13) rehearsal or concert space rental, 14) staff (accompanist, arranger, sound or lighting technician, production assistant, etc.), 15) office rent, 16) repair of equipment, 17) tax preparation and accounting costs, 18) commercial or marketing materials, 19) advertisements, 20) insurance to cover business activities, 21) copyright fees, 22) equipment purchases, including instruments, 23) certain gifts to business associates, 24) travel expenses, including meals,[14] and 25) certain entertainment expenses. This list is extensive, and certain categories require further explanation. I urge you to read Mr. Riley’s book, New Tax Guide for Writers, Artists, Performers & Other Creative People, and be guided by his suggestions. When we employed Mr. Riley’s strategies for the first time, my tax bill was lowered by thousands of dollars.
Another major consideration is your vehicle use. For any mile you drive related to self-employment/contract income, you are entitled to a deduction. The tax savings here can be significant, as the IRS allows you to deduct 56 cents per mile of business-related driving.[15] Keep detailed records of your mileage, and report it accurately.
As you can see, the issue of taxes is an especially complicated one for musicians. Because musicians often earn 1099-MISC income by freelancing, teaching, and working for organizations part-time, careful record-keeping and a thorough understanding of tax law is essential. The electronic template we provide will automatically tabulate your yearly expenses on the “Year-End Income vs. Expense Record.”[16]
HOW TO FILE?
When it comes time to file your taxes, you have three main options.
1. Self-File: Use this option if your income is from employee work only, and your income is reported only on W-2 forms. Visit IRS.gov and you can usually file a form 1040EZ for free
2. Tax Software: Established companies like TurboTax, H&R Block and TaxACT all provide reasonably-priced software that will guide you through the tax preparation process. This is an affordable way to receive help as you file a form 1040. This option is often best if you have a good understanding of tax law and need to file a Schedule C for business-related expenses.
3. Tax Professionals:Although the most expensive option, a professional accountant will often be your best option for filing assistance if you do not have a good understanding of tax law. These professionals may even save you money overall as they find extra deductions. Ask trusted colleagues for advice regarding reputable professionals in your area, and try to find an accountant with a good understanding of tax issues related to musicians.
[1] Riley, Peter Jason. New Tax Guide for Writers, Artists, Performers and Other Creative People. Newburyport, Mass.: Focus Publishing, 2012.
[2] Beeching, Angela Myles. Beyond Talent: Creating a Successful Career in Music. Oxford: Oxford University Press, 2010.
[3] Ricker, 92
[4] Riley, 2
[5] Riley, 6
[6] Cutler, 169
[7] Beeching, 289
[8] Beeching, 289
[9] Ibid.