Got questions about what to deduct, 1099s, and audits? We’ve got tax tips for musicians from a CPA who specializes in the music industry.
This post was revised January 2019. Check out “What the Tax Cuts and Jobs Act means to the working musician” for more tips and updates to the tax code and how it may impact you as a musician.
As April 15th rolls around, thousands of working musicians will be scrambling to get their receipts organized as they prepare last year’s tax returns. For most anyone making money with music, the onus is on you to make the most of the various deductions that can be taken on your federal and state income taxes. To answer some questions and help you prepare for the inevitable, I spoke with veteran CPA and tax guru Alan Friedman to get some tax tips for musicians.
A senior partner at the accounting firm of Friedman, Kannenberg & Company, located in West Hartford, CT, Alan and his team provide accounting, tax, and business consulting services to the music industry, including professional musicians and bands, recording studios, music stores, and instrument and product manufacturers. When he’s not busy advising his clients, Alan records at his own home studio and plays lead guitar with the all-CPA rock band, The Accounting Crows.
Let’s start out by asking one of the key questions a working musician might ask: Are my music-making activities an actual business? How would one know that?
Since there is no dollar threshold, one of the first indicators that you have a business is if you receive a 1099 form from some party for musical services rendered. If you receive one or more of those at the end of January for musical work, then you are doing business in music.
For any unincorporated individual – be they musician, Pro Tools engineer, sound man, songwriter, what have you – who receives $600 or more in annual payment, the party that paid them is deducting your payment from their books, but they are also alerting the IRS and likely the state tax authorities of this payment, too, so that those agencies will be looking for a tax return to come from you.
If instead of a 1099, you were paid a salary and received a W-2 form for the musical services showing payroll deductions, then you may be fine. Let’s say for instance that you were working one night a week at a club as a DJ and earned a few thousand dollars over the course of the year. $50 per week times 52 weeks pencils out to $2,600 for the year. If you had no other income and received a W-2, you would fall under the threshold of having to file a tax return. But you may still want to file one to get back any over-withheld taxes.
Let’s assume that you are receiving a few different 1099 forms from everyone that contracted with you for gigs, touring, session work, etc. What steps are necessary to document your legitimate business expenses?
Understand that when you receive 1099 income, it is subject to federal tax, state tax, social security, and Medicare tax (aka self-employment tax) – but you only pay tax on your net income! Here’s an example. As a touring musician last year, you made $50,000 gross income, but you will only be paying tax on whatever your net income is. You can take deductions that were legitimately incurred, say expenses while you were touring were $15,000. Then you would only be liable for taxes on the net: $35,000.
Now you can see why tracking expenses accurately is such a critical tax tip for any working musician. You not only save federal and state taxes by paying on just the net, you’ll also pay less self-employment tax. Basically, you can save up to forty to forty-five cents in tax for every dollar you spend on legitimate tax deductions if you carefully document all relevant expenses.
So with every indie artist trying to minimize his or her taxes by claiming every deduction and then some, isn’t there a risk to being audited?
Yes, the IRS knows that most self-employed taxpayers like working musicians are scrambling to find and claim every deduction, so the possibility of attracting their attention is high. Of the 1,500 or so tax returns we prepare each year, I would estimate that only about six might get audited. But statistics show us that 95% of the time, that person is a self-employed individual.
Therefore, it’s very important that musicians not only track their expenses carefully, but it’s also essential that they become aware of what expenses are in fact deductible. There are some that are deductible for musicians that may not be deductible for someone else. For instance, phone, office supplies, Internet connection, business-related meals and entertainment, auto expenses, and the like are the typical ones that can usually be deducted from your gross earnings. But then there’s a few that are not as typical. If any of these are incurred in the production of income, then they can be deductible.
- When buying CDs or downloading iTunes songs with the express purpose to learn those songs for a gig, the media cost is deductible as “media and research.”
- Gear you buy for performance and production of income is deductible.
- The purchase of an iPad, laptop, software or hardware used for recording, composition, etc.
These can be expensive and may provide substantial deductions through depreciation expense.
Is it a misconception to think that every dollar spent by a musician pursuing their career is tax-deductible, aka a “write-off?”
Yes, it is. Let me explain why with a funny example. Sometimes when I’m out with a client, they may say, “We’ll let you pay for dinner,” because they think it’s a deduction for our firm as a business expense. According to the tax code, legitimate business “meals and entertainment” is only 50% deductible. So let’s assume it was a legitimate business meeting and with a glass of wine, tax, and tip, the dinner totaled $100. At the end of the day, depending on my tax bracket, this may only reduce my tax liability by $12 for that $100 meal I just paid for! It won’t lower my taxes dollar for dollar as many people think. So don’t be fooled.
For the clients we are doing tax planning with each December, we remind them that if there are things they need to make money with their music – software plug-ins for music production, for example – then by all means get it. But it makes no sense to spend money on frivolous stuff, thinking it will be a tax deduction so it’s “free.” That literally sends the wrong message. Never buy anything solely for the purpose of a tax deduction. Buy it because you can make money with it.
You touched on what the IRS allows, but what are some examples of expenses that are not generally viewed by them as deductible?
Money spent for clothing is usually disallowed. Basically, the guidelines are that if you are buying clothes that you think you can deduct because you might wear it in performance, if that clothing can be worn on the street, then it is deemed to be personal clothing and it is not deductible.
There can be exceptions, however. We were working with a prominent touring guitar player and on his tax return we took a deduction for about $1,500, for what we called “theatrical clothing.” It turned out that he was audited, and the auditor initially disallowed it, as they normally do for clothing. At our audit meeting, I had brought our client’s tax client file and in the very back of it I had kept the tour program, which ironically included pictures of the band members performing. There he was on the stage wearing purple satin pants, a leopard skin jacket, a bright green scarf and pink sneakers. I showed the picture to the auditor and he had to agree, it wasn’t something you’d wear out on the street, so the deduction was allowed in that case.
Another example that you think would be allowed, is let’s say you are a commentator on TV and that a new suit or dress is needed, and you have to spend money on makeup. Even though getting the gig as a TV commentator triggered your purchase, these expenses are not deductible, because you can wear the suit or dress to any event, and the same applies for makeup.
Is there a rule of thumb for a percentage that musicians should reserve from their income earned through music during the course of the year to be in good shape for theirs taxes?
To be safe, I tell our working musician clients to reserve roughly a third of their income, to be prepared for their taxes. If they make a LOT of money, they could be going up to a 40-45% tax bracket, but you’ve got to remember your taxes will be calculated using the net, not the gross. I always like to say a third would be great, and to keep it separate in a savings account. Once they owe over approximately a thousand dollars in tax, the IRS will not let them wait till the end of the next year to make their tax payment. Let’s say they owe $8,000 in tax for year one; during year two, the IRS will require “quarterly” estimated tax payments based on the amount you owed the prior year and divided up into four equal payments over the course of the next year … $2,000 per quarter in this example.
There can be a couple of exceptions, depending on the timing of how you make your money, or if your income will go down significantly from one year to the next, so it’s a good idea to always check with your tax preparer.
It’s tax time, so I’m seeing a barrage of ads encouraging me to do my own taxes using a software program or a national tax prep service. Does that work for working musicians or is there an advantage to hiring a qualified tax preparer familiar with the music business?
If you are a US taxpayer who had a steady job during the year with a W-2 and an interest statement from the bank, Turbo Tax is a fine answer. You have a simple tax picture, and you’re probably looking to get your refund quickly or pay a little into the system.
But for any working musician who is getting 1099s or W-2s for their music work and has related business expenses to deduct, the way you take business deductions for an employee versus a self-employed person is different from one another. Some of the examples we discussed give just a glimpse of the complexity that lies in the tax code for working musicians.
You wouldn’t do your own root canal or knee surgery, so why do your own taxes if you are self-employed musician? I can safely say for the majority of the tax returns that we prepare for our music industry clients, we are saving those clients more in taxes than the cost of preparing their return based on our working knowledge of the industry.
I would also suggest that your tax preparer should have some working knowledge of the sector you work in. There are subsets even within the music industry. You’ll also get peace of mind, knowing that if the IRS has questions or signals an audit, you have a professional to help who knows your situation.
The following articles by Alan provide more information on business, financial, and tax tips for musicians and bands.
I Can Deduct the Making of My CD … Right?
Advice on how to track expenses and income for working musicians that sell their own records.
Taxes and the Working Musician
More musician tax tips on deductions to keep your business well-organized.
A CPA’s Advice for Self-Employed Musicians
Info on the differences between various types of business, including partnerships, LLCs and corporations
Keith Hatschek is a regular contributor to the Disc Makers Blog and directs the Music Management Program at University of the Pacific. He has also written two music industry books, How to Get a Job in the Music Industry, which just came out in its third edition, and The Golden Moment: Recording Secrets from the Pros His latest book, The Historical Dictionary of the American Music Industry, has just been published in fall 2018. Keith was recently featured offering a range of music industry career advice in Episode #33 of the Scharff Brothers’ Mentoring for the Modern Musician Podcast.
What the Tax Cuts and Jobs Act means to the working musician
A look at the Music Modernization Act
Work For Hire agreements: The producer’s perspective
Work For Hire agreements from a musician’s perspective
Gigging, touring, and performance contract tips