Thanks to Michelle Payne and Ed Pearlman for starting the dialogue about taxes in their recent blog posts. I am going to expound further on Ed and Michelle’s blogs. They showed you what you can deduct, I’m going to offer suggestions on how keep all of your records organized so they are easy to deal with at tax time. I can’t say this will definitely work for you, but I know this system works for me. Staying organized and doing minor tax prep tasks year round will make tax time less stressful.
I own a fanfold file folder and several plastic file boxes. The fanfold folder is setup in this manner:
- Twelve pockets labeled by month
- One pocket dedicated to my Paypal records for the whole year (although one have another 12 pockets labeled by month and then split the Paypal records up, making them easier to seach)
- Two pockets for my mileage records (because I have two vehicles)
- One pocket for important financial paperwork that I might have to reference at a later date…insurance documents, etc.
If you haven’t already, take Ed’s categorized list of deductions and enter them as expense categories in Music Teacher’s Helper. It will take some time to set up, but this system makes it simple to print out a list of totals for your deductions at the end of the year.
I enter my paper receipts daily into Music Teacher’s Helper, after I reconcile my students’ lessons for the day. Then I file the receipts into the appropriately labeled month of the fanfold folder. You need these receipts to back up your deductions. The fanfold will just help you keep them organized in case you need to find them later. The fanfold is also portable, which makes it easy to continue filing receipts if you are away from home for a period of time.
By the end of the year, usually my fanfold folder is ready to bust at the seams. Every December, I empty out one plastic file box of tax records that is five years old. You can throw them out after three years, but I wait five years to be safe! I move the newly ended tax year’s records out of the fanfold file folder and into that empty file box. I will set up a file system in the box that mirrors the the fanfold folder. That frees up my file folder so I can start all over on Jan. 1st of the new tax year. I put my daily planner from the completed tax year in the file box, still it’s three ring binder to keep it organized. It serves as a journal/log of my year. This can be an important document to help backup tax records and mileage records. I may also include wall calendars from the various studios I teach at as further documentation of my activities throughout the year.
As various forms come in from the groups that I work as an independent contractor with, I will file them into the file box. When I am ready to begin my taxes, all of my totals can be retrieved from Music Teachers’ Helper or I can find it quickly in my file box.
If you are going to take the mileage deduction, you must have a written record of your travel throughout the year. Download and print a mileage log for free at these sites (you will need Adobe Acrobat to read them):
I will attach a few of these blank mileage records to a clipboard. I then put a clipboard in each vehicle I drive. (Be careful where you store the clipboards as they are prone to sun fade.) Record both your personal mileage and your business mileage. Business mileage is driving to a gig, a studio you teach at, or to a rehearsal, for example. Personal mileage is going to the beach for a vacation, going to get groceries…you get the idea. As I complete each page of the log, I will total the business and personal miles, and then file them into my fanfold folder under the appropriate vehicle.
To keep yourself on track throughout the year, have an organizational session in August. One of my peers takes a weekend in August and totals his mileage, organizes all of his receipts, assesses his income and expenses, and talks to his accountant about any changes that may have occurred in his situation. This is very smart as this is usually a slow time for most of our studios. He then can plan purchases throughout the remainder of the tax year, and plan IRA contributions to minimize his tax bill. Better yet, he usually gets his taxes done very quickly every spring, unlike those of us who wait to do it all at once. This mid-year break never takes long….perhaps a day and a half out of the summer. And he has fewer surprises on April 15th since he was better able to anticipate the outcome.
I use Music Teacher’s Helper to print out a list of my yearly income and deductions every October. This helps me make purchasing decisions about what my studio needs before the tax year ends. If I conclude that I would like more deductions than I already have, I will step up some purchases that would have been delayed until the new year. Last year, I purchased a document scanner, a color laser jet printer, extra hard drives, I stocked up on instrument strings, and I had repair work done on instruments. I might have put off these actions until ’09, especially with holiday shopping to do. However, my printout in October made me conclude that making these purchases would be a good decision, and I still had plenty of time to plan my purchases. Another option to employ is making a larger contribution to your IRA.
Again, I am just a musician, not a tax professional. I have found that these techniques have worked to keep me organized and keep my stress about taxes at a minimum. However, I implore you to check with your accountant.
On that note…make sure you have a GOOD accountant who understands the deductions a self-employed musician can take. Case in point: one of my peers went to a very well known tax firm who did his taxes. He ended up owing $7000. After reviewing his taxes with him, I found that the professionals at the firm missed some deductions that any self-employed iindividual should have received, and several that should have been deducted due to of his line of work. They simply didn’t know how to deal with his specific situation. On the other hand, watch out for folks who play fast and loose with taxes. I have heard of tax preparers who tell their clients to “Go home and count how many CDs you have. We will multiply that by $10 and that’s a deduction for you.” Well, not without the appropriate receipts it isn’t….but the tax preparer doesn’t mention that, either. So find a good accountant, get organized, and make time to stay organized. You’ll find yourself far less stressed and better able to cope with tax time. You’ll also find yourself saving money and making the most of your legal deductions.
If you have any tax organization tips to share, or if you want to refer the community to a terrific accountant who has musicians’ deductions down…please post a note in the comments. We’d love to hear from you.