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.
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.
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!
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.