No Fear Filing Taxes With These 10 StepsMar 29, 2023
Have you ever heard someone say, “How do you eat an elephant? One bite at a time.” Removing the FEAR out of filing your taxes is pretty easy if you just break it down into a few simple steps and take one bite at a time.
Music is a calling, and those who heed it often devote their lives to honing their craft. However, when it comes to taxes, the process of filing can be a little daunting, or even downright scary!
As a musician, you have different rules and regulations to follow compared to other professions, which can make tax season all the more challenging. In this blog post, I’ll take you through a step-by-step approach on how to file taxes for musicians, which documents to have, and how to get write-offs and deductions.
Disclaimer – I am not a CPA (Certified Public Accountant) or tax professional. This blog is only intended for insight and advice based on my own experience as a life-long Career Musician.
To start with, you'll need to collect all necessary documents in order to file your taxes. This includes W2's, 1099's, and receipts for any business expenses or equipment you have purchased within the year. It's important to have all of these documents organized to make the filing process smoother.
Here are some common questions:
- What happens if you file your taxes late?
- Do you file as a Sole Proprietorship, DBA, LLC, S-Corp?
- Is it better to use regular mail or file electronically?
- What is an ES (Estimated) payment?
- What is SE mean? (Self-Employed)
Don’t worry, we’ll cover all of this, keep reading… Plus, you can watch this video podcast with Scott Brown, who is not only my accountant but also a tax attorney with decades of experience.
1. WHAT ARE TAXES AND WHY SHOULD YOU PAY THEM?
Taxes provide revenue for federal, local, and state governments to fund essential services--defense, highways, police, a justice system--that benefit all citizens, who could not provide such services very effectively for themselves. Taxes also fund programs and services that benefit certain citizens, such as health, welfare, and social services; job training; schools; and parks. Beware, if you avoid paying your taxes or attempt to avoid the IRS in general, they will come after you… I speak from experience! Who Should File a Tax Return | Internal Revenue Service
The good news, the IRS, believe it or not, is typically willing to work with you through any situation of hardship. In fact, you’ll hear Scott and I talk about an OIC, which is an Offer In Compromise. More on that later, but let’s get started with the basics.
2. GETTING PAID HAS NEVER BEEN SO I&E
Play a late-night bar gig every Friday? Do sessions by day throughout the week? Compose for Youtube or other media platforms? Write and produce with other artists? Or how about those wedding or corporate gigs that pay over $1,000 every month or so? Or maybe you earn royalties from your PRO (ASCAP, BMI, SESAC) or via your publishing deal? These might show up as auto-payments directly into your bank account.
With the myriad of apps on the market like PayPal, Venmo, Apple Pay, Zelle, CashApp, it’s easy to actually get the money. Or if you’re working with an old-school type band director maybe it’s a check. Either way, the money is yours.
Yep, these are all traits of the trade and typically getting paid is a no-brainer.
This money earned is your income. And the money you pay out for bills, other musicians you hire, or anything else, are your expenses. Hence, I&E – Income and Expenses. Now, if you do go with a tax pro, they will be likely to draft I&E reports for you. Or you can also create these from any software platform that does your bookkeeping.
However, if you’re not sure what your income and expenses are, you can start by keeping track of your gigs, music sales or royalties, and other revenues. Consider using accounting software or consulting with an accountant who specializes in music-related tax issues. If nothing else, keep track of all this information with a Google or Excel Sheet. This is where the rubber meets the road. Being a Career Musician means that you are now a professional. Which means you must act like one and run your business like any other.
It's never a good idea to ignore the IRS, as the consequences can be severe. They do have systems in place to help people who are struggling to pay their taxes, so it's always best to be proactive and communicate any issues or concerns. If you do receive a 1099 or W2, make sure to keep it for your records. So, if you're unsure about your income and expenses, it can be a good idea to consult a tax professional. They can help you understand what you need to file and what deductions you may be eligible for. To keep track of expenses throughout the year, make sure to implement a bookkeeping system. This can save you a lot of time and stress when it comes time to file taxes. Here’s a great rundown of the various platforms from Forbes. Even if you don’t use it to file your tax return, you can implement it for bookkeeping, which is paramount when it comes to tracking all of your I&E’s throughout the year.
3. FILING DOCUMENTS
Let's talk about the necessary documents required to file as a musician:
- Tax Return Form 1040
- Schedule C form
- Expense Receipts
- Income Verification (1099’s & W2’s, W4’s & W9’s)
- I9, Passport, Driver’s License (for citizenship & identification purposes)
But who sends you these 1099’s and W2’s? If you’re an independent contractor i.e gig worker, you should receive a 1099 form from the person or entity that hired you for the gig or session. If you work as an employee, you’ll get a W2 form from your employer. In other words, if you’re a staff writer at Peer Music, you’ll most likely be receiving a W2. On the other hand, if you’re truly self-employed and rely solely on your own ability to generate income, then you’ll be receiving 1099’s from all of the people who temporarily employ from gig to gig.
What should I do if I don't know my income and expenses? Simple, DO NOT PANIC! 🥴 It’s easy… just go through your calendar of gigs, sessions, and other events in which you earned money as a musician in some capacity and make a list. Then check to see if you received either a W2 or 1099 from all of the people that hired you. If you haven’t, reach out to them requesting one. Trust me, they’ll be more than willing to provide this for you as to prevent them from being liable for the money they paid you.
4. FILING ENTITY
Let's talk about the different types of business structures and whether you need one. If you are a solo musician, then you can file as a sole proprietorship. This means that you do not need an LLC, S-Corp. However, if you have a working band or are planning to expand your business in any way such as studio work, producing, composing etc, it may be worth considering an LLC or S-Corp. Not only will these types of entities provide liability protection, but they can also offer tax benefits. Check out Businesses | Internal Revenue Service for more information about the various business entities that are available.
A DBA simply means – Doing Business As. This is a way to conduct business under a different name other than your personal name. For instance – Music Director and Artist Adam Blackstone’s company is BASSic Black Entertainment. Instead of using his name, that’s his company or DBA. However, that’s not to say Adam uses a DBA, I know for a fact he’s incorporated based on our conversation on The Career Musician Podcast EP17.
In the beginning of my career I was just an individual who happened to play guitar for a living. So I filed an individual tax return as a sole proprietor. Which simply means that you’re the sole owner of said business. Which technically really isn’t a business in the typical sense, but hence why The Career Musician exists! To empower musicians just like yourself when it comes to operating like a legit biz!
After a few years of operating as a sole proprietorship, I opened a DBA account with my bank and created a cool name for my very own music business! Hooray, this is the first step in becoming a bonafide Career Musician and turning your dreams into REALITY!
5. WRITE OFFS
A write off is simply a business expense used to reduce your taxable income. Otherwise known as a deduction. One of the benefits of being a musician is that you have several opportunities for deductions or write-offs. As a musician, you can claim expenses related to the production and promotion of your music, such as recording fees, marketing expenses, travel expenses for gigs and more. You can also claim deductions for equipment purchases, repairs, and maintenance. Even the cost of streaming accounts, music lessons or coaching. It's important to note that the rules for deductions can vary based on where you live and the specific regulations in place.
To do bookkeeping for your business, note all of your expenses and keep all receipts. It’s also helpful to track your mileage and gas receipts as they can be claimed as expenses. We used to have to keep paper receipt copies of everything but nowadays of course it’s super easy with digital copies. Same goes for all of your bank statements, credit card statements, home mortgage or rent payments, utilities etc. Everything can be conveniently set up online and linked to a software program to help keep things organized.
You can also claim internet expenses, such as your website's cost, as well as depreciation or amortization, which is the process of spreading the cost of an asset over its useful life. In other words, that dope-a$$ recording rig you just spent over $10,000 on, can be written-off over time with depreciation.
Additionally, make sure that you keep copies of your tax returns as well as any receipts/invoices from clients or vendors. This will make preparing your return much easier!
As far as claiming your home as a business expense, it can be complicated. It is possible, but careful documentation and calculation will be key. If you choose to claim your mileage or gas receipts, make sure to keep detailed records and receipts. Lastly, it's important to save all receipts and documents for at least three years, as the IRS could audit your taxes up to three years after the fact. What’s an audit you ask? When the IRS thinks that you may be claiming too many write-offs as deductions, or that your numbers simply don’t add up, they reserve the right to be able to audit your books and grill you on every single last cent that you claimed to earn and spend. If this happens, GET PROFESSIONAL ASSISTANCE IMMEDIATELY.
Ok, phew, let’s take a break…watch this 30 sec video for a good laugh! 😂
And give this link a click to take the deductions deep dive 💦
Besides the items mentioned above, there are several other deductions a musician can claim. These include things like legal or accounting fees, web development costs, and music licensing fees. Additionally, it can be helpful to understand the difference between depreciation and amortization when filing taxes. Depreciation is the decrease in value of an asset, while amortization is the paying off of a debt. As well, any donation receipts and proof of charitable contributions are deductible. In other words, did you donate some instruments or recording gear to a church or other organization? That’s a legit write-off!
Proof of healthcare coverage: If you are not covered by healthcare insurance, you may have to pay an additional penalty for that. I know it sucks, right? But look, nowadays there are ways for musicians to get affordable healthcare. Take the time to do some research for the options available in your state.
Oh by the way, if you’re a gigging musician who tours regionally, domestically, or internationally, you can claim ALL of your expenses for traveling, meals, lodging, and other work related expenses incurred while on the road. On tour this summer? Write that s!it OFF!
You can also maximize tax deductions as a musician by claiming expenses related to the purchase of songs or sheet music, legal fees, streaming subscription services, union dues, rehearsal and recording studio fees, and educational expenses. If you're not sure if a particular expense qualifies, consult your tax advisor or accountant or look it up!
Do I need to save all of my receipts and can I claim my home as a business expense?
Yes, save every receipt, even if it seems small or insignificant. Remember, it's a lot easier now with digital files. As for claiming your home as a business expense, it's a little more complicated. You can claim expenses related to the use of a part of your home as a business expense for your office and studio or even a rehearsal space. A tax professional can help you determine what percentage of your home could be considered for such claims.
6. HIRING OTHER MUSICIANS
If you’re a producer, composer, band leader or artist, you’ll most likely be hiring other musicians on occasion to work for you. These would be considered employees only in the sense that they’re independent contractors. In which case, you will also need to file W2 or 1099 forms for them. But the good news is that you’re not responsible for paying health and welfare benefits or anything like that. Once you send them their 1099 or W2 with the income amount, it’s their responsibility to claim that income on their own tax return.
7. HAVE NO FEAR IF YOU DO THIS ONE THING
FILE ON TIME!
Or, if life circumstances have you wrapped up around tax season, it’s all good, just be sure to file for an extension before the tax filing deadline. This will give you another opportunity to file the necessary documentation in six months but ya still gotta pay now.
If you do end up filing your taxes late, you may face some consequences. The IRS can charge fees and interest on late payments. It's important to try and file on time to avoid any additional costs. If you are unable to pay your taxes within the designated time frame, there are payment plans available, and it's always better to communicate with the IRS than to ignore the situation altogether.
8. SHOW THEM THE MONEY
When it comes to paying the IRS, you can either pay online or send a check. You can visit the IRS website and pay using a debit or credit card, direct debit, or electronic funds transfer. In order to file electronically, you will need to have an EIN, (Employer Identification Number) which you can register for on the IRS website.
Be warned, in either case, you MUST be extremely careful and pay extra special attention to detail! With paper filing via mail, there is a greater chance for human error, so if you use mail, be sure to ALWAYS send all documents and your check via Certified Mail – Return Receipt Requested. This is the USPS tracking system that lets you know when the IRS has received your documents and payment. There is a small fee for this service but once again, trust me, the fee is more than worth the headache if the package gets lost, stolen or damaged.
Now, let’s talk about Estimated Tax Payments (ES) Payments. As a self-employed musician, you're responsible for paying estimated taxes quarterly. This form of payment allows you to make payments four times a year, (every three months) as a non-employee to pay your share of Social Security and Medicare taxes. This is a great system actually because it allows you to make smaller payments that might be more manageable than a huge chunk of cash at the end of the fiscal year.
9. LET’S MAKE A DEAL!
Remember earlier when I mentioned an OIC (Offer In Compromise)? This simply means that if you cannot afford to pay your outstanding tax liability, then you can make them an offer to compromise and pay them something instead of the whole debt amount.
WARNING – This should not be attempted on your own if you have tax debt. Be sure to consult with a professional and deal with it head-on. DO NOT WAIT or PROCRASTINATE! The longer you wait, the more fees you’ll incur.
There’s typically a few things that your accountant will coach you through in preparation for presenting your case for an OIC. Offer in Compromise | Internal Revenue Service
- Letter of Hardship
- Bookkeeping and Banking Records
- Several Letters of Character
- List of Assets and Equity
- Proof of Employment or Ability to Pay
Again, there’s a silver lining here in that the IRS is willing to make a payment plan agreement with you. But if you should fail to pay any of the payments agreed upon within the deadlines stated, the deal is OFF! Then you’re talking about some serious issues because the whole amount of the original debt is due in full IMMEDIATELY. Yikes!
10. WHEN THE GIG IS OVER
All good things must come to an end as such even bad things must end too. The process of paying taxes is definitely a pain the a$$. But the “big tip” left in the tip jar at the end of the night is – You’re not alone…
ALL musicians that work in the music industry and earn monetary compensation MUST pay taxes, period. This is why I strongly suggest, nah nevermind, I command you to go find an accountant who can help!
Look, even though Scott B. don't agree, if you can’t find a trusted independent CPA (Certified Public Account) who understands the nuances of filing for a musician, go to H&R Block or somewhere comparable and get help. TurboTax has virtual tax consultants that can help you online. Block Advisors is also a great resource.
There should be absolutely no FEAR in filing your taxes. If you have questions, go on a deep internet dive and explore all there is to know about tax laws and how they are applicable to filing as a self-employed, independent contracting, solo-prenuer, indie-musician, thing-a-ma-jiggy person. From my experience, it’s one thing to not know something, it’s a whole different story when you know better but just ignore it.
- Keep track of all your documents
- Use an app and/or software program
- File on time or file for an extension
- Take advantage of all the deductions available
- If you owe back taxes, stop the bleeding and get help now
- If you're unsure about how to file, contact a tax professional or consider utilizing resources provided by the IRS.
Got more questions?
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