A pile of tax forms, books on tax preparation, receipts, a pen, an eraser, and a calculator
Five Timely Tax Tips for Musicians

Five Timely Tax Tips for Musicians

For composers, performers, and teachers of music, January is a great time to rest and recover from the holiday buzz of performances and parties.  It’s a good time to get your instruments tuned up and repaired, and to plan your music calendar for the year. And it’s a great time to get ready to file your income taxes.  You may have had several gigs during the year for which taxes weren’t deducted from your pay. Settling up your income taxes with the IRS in April can seem scary. However, as I tell my tax clients, filing your taxes doesn’t have to be horrible.  With some planning and good record keeping, tax filing can go very smoothly. And you can manage to keep a lot of the money you earned.

Here are five major tips for keeping as much of your money as possible.

1. Know Your Tax Obligations

The federal government expects you to report ALL of your income from ANY source when you file your taxes.  That includes the income from all of your gigs – if you’ve earned at least $400 in total from them – and from any “regular” job you may have.  Your state and town may or may not have similar requirements.  If you work in the gig economy—and if you’re a musician you almost certainly do—the IRS considers you to be “self-employed.” That means that the IRS considers your gig work to be a business, and there are two types of federal taxes you need to pay on the money you earn from your performances, the classes and lessons you teach, and the music and arrangements you create:

  • Income tax – that’s “The Tax” you owe on all the money you earn, depending upon your tax bracket and deductions
  • Self-Employment tax – that’s Social Security and Medicare tax. It corresponds to the FICA (Federal Insurance Contributions Act) deducted from employees’ payroll checks. You have to pay 15.3% of your net gig income for these. The breakdown is 12.4% for Social Security and 2.9% for Medicare. You’re obliged to pay that much because an employer would normally pay 7.65% of your earnings to the IRS on your behalf for Social Security and Medicare, and you would be responsible for another 7.65%. With gig income, you pay both the employer’s and the employee’s share of Social Security and Medicare.  Too many people get into trouble by overlooking the self-employment tax. You shouldn’t be one of them!

Here’s the big tax issue: As a musician, music teacher, or composer, you may need to put away one third to one half of your net gig income for taxes. Or as much as you can if that much isn’t possible.  Any way you look at it, it’s a substantial tax bill.  For the coming year, keep in mind that our federal tax system is set up to be pay-as-you-go, so you may need to pay estimated taxes every quarter if you expect to owe the IRS more than $1,000 at filing time.

2. Gather Your Income Records and Add Up Your Gig Income

In the next few weeks, you should receive tax forms for income you’ve earned last year. These will include any W-2s for employee jobs, and 1099-MISC forms for any gig or contract work for which you were paid over $600. The client isn’t required to send you a 1099-MISC if you were paid less than $600, though you are still required to report that income to the IRS.  You may need to remind the client to send you the forms—especially because a lot of music business is still done on a word or a handshake.

Check the forms as soon as you receive them to make sure they’re correct. Compare them to your own records of your income, if you’ve kept them. For the 1099-MISC forms, you want your income to appear in Box 7, “Nonemployee Compensation” rather than Box 3, “Other Income.” That’s because you can deduct business expenses against nonemployee compensation but not against other income.  Try to get the client to send you a corrected 1099-MISC form if the income numbers are wrong or the income is reported in the wrong box. The IRS will match the forms your client sends them against the forms you send them, so they need to match.

A handful of receipts

3. Gather Your Expense Records and Deduct Your Gig Expenses

You can and should subtract (“deduct”) normal expenses from the income you receive from your music business.  A “deduction” is an item that can be subtracted from the income you earn before you pay taxes on that income, such as the goods or services (“expenses”) you need to buy in order to run your gigs.  By deducting your gig-related expenses, you owe less tax and keep more money.  That’s why it’s important to keep track of your business expenses!

For your self-employed (gig) income, you can file an IRS form called a Schedule C–“Profit or Loss from Business” form, with your annual taxes to deduct the related expenses from your gig income and reduce the tax you owe. You’ll also need to file Schedule SE–“Self-Employment Tax”.  Schedule SE reflects the sum total profit or loss you have from all of your gigs.

You’ll file one Schedule C for each type of business, not one for each gig, so a single Schedule C should cover all of your music business. The IRS has rules about what business expenses are deductible and to what extent they’re deductible.  For example, your business meals are only 50% deductible, while the interest and fees on your business credit card–one that’s used only for business-related purchases–can be 100% deductible. The expenses you deduct must be “reasonable and normal” for the type and volume of the business.

For musicians, music teachers, and composers, you can usually deduct these types of expenses:

  • Instruments (very expensive ones may need to be depreciated instead of deducted)
  • Repairs/Maintenance on instruments
  • Sheet music and music-business books
  • Instrument consumables (drum skins and sticks, guitar strings and picks, valve oil, mutes, music stands, polishing cloths, mouthpieces, tuners, cases, straps, etc.)
  • Insurance for instruments
  • Travel to/from gigs and performances
  • Mileage between gigs at 57.5¢ per mile (keep the mileage records in your car!)
  • Meals when traveling for gigs and performances (at 50% of the cost)
  • Recording equipment (if not extravagant)
  • Promotional recordings, photos, etc.
  • Rental of performance, rehearsal or teaching spaces.
  • Subscriptions to trade magazines (such as Billboard)
  • Copyright and registration fees
  • Lessons and instructions that you take to improve your musicianship
  • Fees related to maintaining your website and e-mail for music-related activities
  • Rent for storing your gear and/or for your practice space
  • Memberships in professional organizations and unions
  • Professional fees (attorney, manager, agent, accountant, etc.)
  • Tickets/fees for cultural events (within reason!)
  • Office supplies (pens, paper, printer ink, etc.)
  • Equipment used exclusively for your business (laptop, printer, etc.)

And because you have a business, you can also deduct:

  • Half of your self-employment tax! Because businesses are allowed to deduct the Social Security and Medicare taxes they pay on behalf of their employees, you can deduct the portion of your self-employment tax that an employer would have deducted.
  • Your health insurance premiums and medical expenses, provided that you paid for them yourself and aren’t eligible for health insurance from an employer or spouse’s employer. This deduction includes dental insurance and dental expenses, too. The health insurance and the medical expenses are deducted in different ways on your tax forms. Specifically, the insurance would be deductible as an adjustment to income; your medical expenses may qualify as itemized deductions.

Subtract your total gig expenses from your total gig income to determine your net income. It’s the net income that you’ll pay the self-employment tax on. Remember that you need to have some income in order to deduct the expenses, and check with your tax advisor about specific deductions.

A calculator, a pen and a marked up list of printed numbers.

4. Be Prepared to Prove You’ve Got a Business and Not a Hobby

You’re expected to be trying to make a profit on your business, even if you don’t make a profit in a particular year. It’s important for you to know whether your music business is actually making money for you.  How do you know if you’re making a profit?  Here’s the crucial equation:

Your Income minus Your Expenses equals Your Profit (or Loss) equals Your Net Income

In other words, the money you get from each type of gig or side business, minus the costs of generating that money, equals your profit or loss. You definitely want to make a profit! Your federal taxes—and state income taxes, too—are based on your profit or loss for each type of gig you have. That profit or loss is called “net income,” and it’s your net income that you’ll pay taxes on.

The IRS has guidelines to determine whether a given activity is actually for profit (a business) or not (a hobby). You can use business losses to offset your other taxable income. You can’t use hobby losses the same way.  To distinguish a business from a hobby, the IRS will question the time and effort you put in, whether you intend to make a profit, whether you depend upon the income of the business, etc.  Keeping good records of your income and expenses is a good way to prove that your gigs should be considered a business for tax purposes.

5. File Your Taxes Even If You Don’t Owe or Aren’t Required to File

Once you start your working career, you should file your taxes every year, even after you’ve retired. If you’ve got less than $400 in net gig or self-employment income for the year, you’re not required to file an annual tax return unless you have other income which requires you to file. Let’s say that you don’t have enough income of any kind to be required to file annual taxes.

You should file your taxes anyway.

Why? For one thing, you might get a refund on any income taxes you’ve already paid, especially if you’ve also got employment income from a W-2 job. You have three years to file for that refund.  After that, you’ve lost the refund permanently. And if things go well the next year and you have a lot of gig income, you may be able to average your income to reduce your taxes.

For another thing, filing your taxes can prove that you lived in a particular place, that you owned a particular house or piece of land, that you paid a specific amount for a stock or bond, that the funds which suddenly appeared in your bank account were inherited from your great uncle and not earned illegally, and a lot of other things you may one day need to prove!

These tips should help get you through filing your 2016 taxes.  (If you’d like more detailed information and checklists on how to deal with your taxes, I’ve recently written a book that’s available for Kindle on Amazon.com.) Happy filing, and remember to start keeping good records of your gig income and expenses for 2017!

The author posing with wig and sunglasses for her alias Madison Goodwin

Madison Goodwin is the pen name of a professional tax preparer and tax hobbyist based in Brooklyn, New York.  She earned her B.A. from Barnard College and her M.B.A. from New York University.  Madison has worked in management and consulting for several major banking, investment, and insurance companies. Her new book, Hot, Sexy Taxes!: A Lighthearted, Easy Guide to Your Taxes in Today’s Freelance and Gig Economy, is available for Kindle on Amazon.com.You can reach her at Madison@madisongoodwin.com.

NewMusicBox provides a space for those engaged with new music to communicate their experiences and ideas in their own words. Articles and commentary posted here reflect the viewpoints of their individual authors; their appearance on NewMusicBox does not imply endorsement by New Music USA.

2 thoughts on “Five Timely Tax Tips for Musicians

  1. Sarah Lockhart

    A few important points that the article missed, or was slightly misleading about:
    1. Grants, donations, crowdfunding
    Income from grants and awards is also taxable, and income from individual donations, including crowdfunding campaigns, is often taxable. Some artists think that because grants and donations are gifts, that they aren’t taxable. If your mom gives you $2000 to record an album, it isn’t taxable. However, if you receive a $2000 grant to record an album, that money is taxable. There is some gray area as far as crowdfunding goes, depending on the stated goal(s) of the campaign, and your relationship to the donor. Because crowdfunding platforms (Kickstarter, Indiegogo, GoFundMe, etc.) view themselves as processors, akin to PayPal or banks, you might not receive any official tax documents from them. However, you need to keep track of what you raised, and you can deduct the fees charged and costs you have from doing the campaign. If you received donations or grants while working with a fiscal sponsor (e.g. New Music USA), the money you received is taxable to you. You can take advantage of that relationship by strategically planning the timing of actually receiving the funds. For example, if you were awarded a grant in November for a concert taking place in April, you could arrange with your fiscal sponsor to wait until January to pay you, so that you can match the income with the expenses.

    2. Paying others
    If you are a composer or bandleader or just the member of the ensemble that agreed to fill out the paperwork and manage the money, you are often in the position where most of the money you receive is getting paid to other people. You will want to deduct the amounts you pay others. Just as the entities that pay you are required to send you a 1099-Misc if they pay you $600 or more for services in a calendar year, you have the same obligation to those you pay. There is a checkbox on the Schedule C that asks this very question! However, just because you don’t file the 1099s for the people you pay, doesn’t mean you can’t deduct the payments. It is, however, something that, like an earworm or an unwanted software upgrade, could come back to haunt you later: if you suffer the misfortune of an audit, for example, or if the IRS questions whether your music business is actually a hobby.

    3. Deductions from Net Income vs. General Deductions
    The tax rules for self-employed people are complicated, and often confusing. As the article states, you only pay self-employment tax on the net income from self-employment. Most of the deductions the article mentions are expenses that will reduce your net income from self-employment. However, some of the deductions the author mentions are general deductions — they will reduce your regular income tax, but will not affect your self-employment tax. For a significant number of music people, the 15.3% self-employment tax is more than their regular income tax. Deductions for 1/2 of self-employment tax and health insurance costs are general deductions. The amount you can deduct for health insurance is limited to the amount of your net self-employment income. That means, if your net self-employment income was $1000, then you can only take a deduction of $1000 for self-employed health insurance, and if you had a loss from self-employment, you don’t get to take that deduction.

    4. The Home Office/Studio
    For many musicians and composers, there are very few parts of our lives that are separate from our music, and that includes where we live. A home office or studio is a valid business deduction. This includes the equipment in it, as well as the rent (or mortgage and property taxes) and utilities. In order to be deductible, the space in question has to be dedicated to the business of music. While you might get your best done on your laptop while sitting in bed, your bed doesn’t qualify as a home office/studio. No, not even if your bed has been outfitted with sensors and contact mics and an interface that sends the signal to be processed in Max MSP, recorded, and posted on soundcloud. Also, you cannot use a business use of home deduction to create a loss. The most it can do is reduce your net income to 0.

    5. Missing Receipts and Substantiation
    You can actually deduct expenses if you don’t have the receipts or documentation for them … a lot of the time. A good faith estimate is acceptable. However, just because you can do this, doesn’t mean you should slack on record keeping. Making a point of paying for things with a check, card, or electronic payment method is a good way to make sure you have at least some documentation of your expenses. There are types of expenses that you need to be able to provide receipts for: travel, meals, and entertainment. This causes a lot of headaches for the touring musician, especially the meals. Fortunately, there is another option: the per diem method. Only use this for when you are travelling. If it’s physically possible for you to go home, and microwave leftovers or heat up a frozen pizza in your own oven that day, you can’t take a per diem. Per diem rates vary from location to location: major coastal cities have higher rates than rural areas in the middle of the state. If your tour or trip is a combination of business and personal, you would only take per diems for the business days.

    6. Depreciation vs. Expense
    As the article mentioned, some things will need to be depreciated (deducted over the course of several years) rather than expensed. This is another gray area in terms of the tax code. The two things to take into account are: the cost of the item and its useful life. If something is relatively expensive ($500 or more) and will last you more than a year, then it is considered an asset, and is to be depreciated. You also need to be careful about things that are used for both personal and business purposes: computers, smart phones, iPads, stereo equipment, cameras. These are things that “normal” people use solely for pleasure and are not deductible. You don’t have to use these things 100% for business in order to deduct them, however, you can only deduct a portion of them — the percentage you determine is business use. With assets that depreciate, you need to keep track (and report) more information about them, than your standard expense. A potentially useful analogy is the section vs. the soloist. Your assets are soloists, while your supplies, office expenses, and advertising costs are sections (they all anonymously combine together to produce the total for their category). Like soloists, your assets get special billing — they are listed individually, on a special form, and you need to report the date you started using each asset for business (okay, this is where the analogy is a bit off), and the cost. You will also want to make note of whether it was purchased used or new.

    7. It’s okay to be a hobbyist
    For some composers and musicians, it might actually be to your benefit to consider your income from music – hobby income. Hobby income is not subject to self-employment tax, and you don’t have to deal with all the record keeping, learning of rules, and the worry that you might be audited and/or your business deductions be disallowed. There are a lot of personal, soul-searching issues involved in this decision — how do you want to represent yourself, what are your career goals — that fall outside of a discussion of timely tax tips. The key issue is that your decision should be realistic: if you aren’t prolific and make very little money from music, then reporting your earnings as hobby income would be appropriate.

    — Sarah Lockhart, RTRP, CTRP
    //amateur musician, professional tax preparer
    //accounting manager, Paul Dresher Ensemble

Comments are closed.