Tax time! If you’re like me, you do it yourself but wait till the last minute!
Partly, no doubt, because it’s a pain and because it’s hard to know sometimes what you’re required to do. Here are some tips that I hope will help out. I’ve tried to tailor it to what’s most relevant to musicians.
I will say one good thing about taxes. Most small businesses that fail do so because of poor planning, and it’s my belief that because the IRS requires businesses to keep track of income and expenses, and analyze them regularly, many American businesses are far more successful than they would have been without being forced to do that work! Okay, on to the task at hand!
Keep in mind that tax laws have been changing right and left, so the best way to file taxes is probably to use one of the free online tax software programs approved by the IRS – just visit this link and click on one of the two blue buttons – one if you make less than $66,000 and the other if you make more than that. You’ll see which free software is available for you or you can use their “wizard” to determine the best software for you.
The reason that software is so helpful is that the makers incorporate all the latest tax law changes and walk you through any questions you need to answer. What they don’t necessarily help you do is categorize your income and expenses as a music teacher/performer. That’s what we’ll take a look at here.
If you are employed by a school, you can use your W2 form to handle your taxes easily, through the online software.
Most music teachers and performers, however, are at least partly self-employed, and this income needs to be filed on a Schedule C form, where you can list your income, your assets (such as CD inventory), and your expenses, which end up being deducted from your income before it is reported on Form 1040 to calculate your taxes. The bottom line is also reported on your self-employment tax, which is often the larger portion of your tax. This is reported on Form SE, which is filled out for you if you use tax software. The self-employment tax includes both the employer portion (you) and the employee portion (also you!) and can add up to about 30% of your income after deductions. It’s a really good idea to set aside 1/3 of your income for this tax, preferably in a special business account, so you don’t get blindsided at tax time. Nowadays you can work out a payment plan or credit card payments for your taxes, but boy, credit card interest will cost you big time, so it’s best to plan ahead. Start now for next year!
If you have owed over $1,000 for taxes, you need to plan to pay 25% of what you are likely to owe in estimated tax payments on April 15, June 15, September 15, and January 15. It’s a pain but you will be assessed a penalty and interest if you don’t do it.
All the information below is assuming you are filing a Schedule C to report income and expenses from your own business. Before even collecting your financial information, check out the categories you’ll need to split them into, by looking at or printout a Schedule C and by reading the instructions for it, which can be very helpful.
Your income can be easily tracked by Music Teachers Helper. Just run a financial report showing your income and expenses for the full calendar year. You may well have other sources of income as well. You can simplify things by entering those all along in your Music Teachers Helper account, or keep track of it on a spreadsheet or account book of your own. One solution for simplifying this is to have all your business income be deposited or transferred (from PayPal, etc.) to a business account. Then you can use statements from that one account to track all of your income.
It’s helpful to collect your information based on the actual lines on Schedule C where you have to report this information, so that’s how this section is organized. Your business expenses are deductble if they are considered ordinary and necessary for you to do your business. This part requires the most work to keep track of – you’re supposed to keep your business receipts as proof of expenses, which is a little trickier these days when the only evidence is often an online charge. If you want to make things easier on yourself at tax time, put your receipts into folders or envelopes by month, or better yet, enter them into a spreadsheet at some point each month. This makes it a lot easier to even know which expenses were for business because they’re fresher in your mind – for example, did you buy office supplies at CVS, or was it toothpaste? A credit card charge won’t tell you this. There are also software and apps out there to help you, by letting you scan and keep track of your receipts, though their learning curve and the amount of regular work they require might affect whether you find them truly useful. One obvious place to store your expenses is in Music Teacher Helper, where you can enter and catalog your expenses, and have it all show up in your annual financial report of income and expense.
Schedule C, line 8. Take a look at these examples, to get a good idea of what the IRS considers “advertising” suitable for your business expenses:
- promotional photos and videos
- brochures, mailers, flyers
- newspaper, magazine, TV, radio ads
- fees for listing services, PR services
- website creation and hosting expenses (Music Teachers Helper can fit in here or see below under Supplies)
- promotional giveaways such as CDs (deduct your cost)
- signs, banners, bumper stickers
- ads on the web, in Yellow Pages
- marketing emails or direct mail
- costs for promotional events
- business cards
Schedule C, Line 9. If you keep a log of your miles driven, dates and destinations, you can get a “standard deduction” based on that mileage, which the IRS figures will cover your gas and maintenance for the car – over 50 cents per mile (the exact amount changes each year). You probably drive to gigs or to places where you teach. If you teach at a school, you can’t deduct the mileage commuting to and from the school, but if you teach at two locations you can deduct the miles going from one to the other. If you teach mostly at home, you can deduct the cost of driving elsewhere to teach, and of course performers can deduct mileage for going to rehearsals, gigs, and any travel expenses other than personal travel (visiting a friend or doing a personal chore) while you are on tour. Don’t forget to track your tolls and parking costs. Maintenance and gas is included in the standard deduction. If you rent a car, the cost is deducted under Equipment (see Line 20), but the gas for a rental car can be deducted separately. This information can be listed on Schedule C, but some information may need to be placed on Form 4562, and again, your tax software (remember, it’s free now online!) will determine this and fill it out for you.
PAYING OTHER MUSICIANS:
If you book a gig and pay other musicians, you’ll list their fees on line 10 for “commissions and fees.”
If you pay for instrument insurance or liability insurance for your studio, this expense can go on line 15 for insurance (other than health).
If you hire lighting, sound, recording, piano tuning, legal, or accounting help, etc., you can list these expenses in line 17 for Legal and Professional Services.
Line 18. Many expenses you would think are office expenses are actually supposed to be listed under “Supplies” so check that paragraph below (line 22) to spot the deductions that apply to you.
- business membership fees to office supply stores like Costco & Sam’s Club
- pickup and delivery services
- bottled water delivery
- costs for backing up data
- office decorating expenses
- cable or phone line if separate for your office
If you rent a car, you can list the expense in Schedule C, line 20a. If you rent teaching studio space, or space to hold recitals, you can list these expenses on the Schedule C in line 20b.
If you pay for rehairing your bow or fixing a ding in your trumpet or keys for your piano, for example, or have other maintenance costs, you can list these on line 21. If your piano tuner also repairs something you can list it here or under Professional Services.
Line 22. You might presume some of these expenses fit in the “Office expense” category, so take a look at these examples of “Supplies”:
- music stands, cases, gig bags, transportation carts
- reeds, picks, oil, strings
- sheet music, music paper, notebooks
- tuners, effects pedals, metronomes
- mutes, mouthpieces, microphones
- books for a curriculum
- monitors, amplifiers, speakers
- blank media, CDs, tapes, recorders, memory cards
- performance wardrobe
- cords, cables
- music filing envelopes and boxes
- bottled water for performances
- reference books, study guides
- GPS systems, map guides
- pens, pencils, paper, paper clips, tape, staples, staplers
- printer supplies
- whiteboard, markers
- stamps, labels, envelopes, mailers
- software for keeping track of billing and expenses (Music Teachers Helper could fit in here or see above under Advertising — as long as you don’t duplicate your expense, either category is justifiable)
DUES, LICENSES AND FEES: line 23
- copyright fees
- union dues
- social security, medicare and unemployment taxes
- professional license fees
- dues and fees for professional organizations
Deduct airfares, buses, trains, hotels, and other travel expenses on line 24a.
MEALS AND ENTERTAINMENT:
Line 24b lets you list your meals. If you eat while on tour or meeting, for example with an interview subject, agent, editor, agent, manager, lawyer, accountant, or with colleagues at an event or retreat to do with your work, you can deduct 50% of your food expenses – the tax software will calculate this. You can also deduct tickets to performances that relate to your work, because that is research in your field.
Line 30 and Form 8829 (your software will handle that!) If you regularly use your home for teaching, office work, and inventory, this deduction is an accurate reflection of some of the necessary expenses that should be deducted from your income. Because some have abused this deduction, it can be a red flag for IRS audits, so it’s not worth claiming if you don’t gain much from it, not to mention that it can be a pain to gather the information you need for it. You’ll need to know the square footage of your business area and the square footage of your entire living space; you’ll need to collect utilities bills and other home expenses for the year that are partially used by your business. You have a much clearer case for a home office if the space you use for work is exclusively used for that purpose, especially if, for example, your teaching studio has its own entrance. You can also deduct the value of office equipment, although the value of big items like computers are supposed to be spread out over multiple years, and there are IRS calculators for how these items lose value over time. You should look up the “section 179” exception, however, which allows you to take a deduction for the full cost of equipment (including musical instruments) in the year you purchased them, though this doesn’t help you if that amount more than wipes out your income for that year – in that case,, you might want to spread out the deduction so it can help you in future years as well, by using the formulas for depreciation of those items. This is all a part of the tax software. The tax software will ask you questions about your home office and take you through what information you need to supply, and will use that information to fill out Form 8829.
Part III Cost of Goods Sold:
A little complicated and I’m not going get into too much detail here, but this applies if you make CDs, store and sell them. You don’t get to deduct the cost of making the CDs because the CDs themselves are valued at the cost you paid for them, so theoretically you didn’t spend that money, you still have it in the form of the CDs! The Cost of Goods Sold section requires that you start with the value of your inventory (cost paid for it) at the beginning of the year (must be the same as ending inventory from last year), and add any purchases, and by deducting the value at the end of the year, it calculates the cost of the difference, which represents the cost of the CDs that you sold that year. You report the income from selling those CDs, and this form deducts the cost you paid to make just the ones you sold. Line 36 lets you deduct the value of any CDs you sent out for review or used as comps or for personal gifts.
I hope all this helps! Keep in mind that I’m not an accountant and am only sharing my years of experience in doing my own taxes as a musician and as owner or director of several related organizations. As I mentioned above, tax laws keep changing, so if you have questions, be sure to check with the IRS (they can be very helpful!) or an accountant.
Best of luck!