It’s no secret that 2020 was a tough year for musicians who rely on live performances both to thrive spiritually and survive financially. Now that tax season has arrived, here are four tax tips for musicians to make the most of their financial situation.
1. Know Your Forms
As a musician, you should report your music earnings. Income is income regardless of why you’re earning it (hobby, business venture, etc). However, that why becomes important in determining where and how to report your income on your filings. If you are conducting your music actives under the umbrella of a business entity here are the forms you need:
- Sole Proprietors: Form 1040 Schedule C
- Bands: Form 1065/Schedule K-1 or Form 1040/Schedule E
If your music is solely hobby income, then you claim it as a line item on your federal tax return.
There’s another form you should be aware of, even if you never see it. If you were able to perform in any venues in 2020, the venue was required to turn in a 1099 MISC form to the IRS if you were compensated more than $600 combined throughout the course of the year. This means there’s no hiding it – the IRS knows what you got paid. It’s never a good idea to try and hide income from the IRS, but with 1099s, it’s definitely time to report it. An experienced accountant like the ones at Orsini & Associates will make sure that this income is properly reported based on each artist’s individual tax situation.
2. Should You Be a Business or a Hobbyist?
The IRS makes a big distinction between the tax implications of the earnings of a business and the earnings of a hobbyist. Therefore, you should know which category your music income should be (Tax Consulting can help if you’re not sure!)
As a business, musicians can deduct certain expenses, sometimes meaning that the expenses exceed your income. Hobbyists aren’t quite so fortunate. However, operating a business means more administrative requirements, like regular tax filings, separate bank accounts and credit cards, and bookkeeping.
Another factor to consider here is pre-paying taxes to avoid getting a big tax bill at the end of the year. If you owe more than $1000 after your tax filings, then it’s time to start paying Quarterly Estimated Taxes. It’s a good idea to consider even if you aren’t sure you’ll reach the full $1000 because by paying quarterly, your payments are spread out throughout the year instead of sticker-shock in April.
As mentioned above, if you’re operating your music as a business, you’ll get the benefit of deductions. Look at your expenses and see how you’re investing in your business. Expenses like buying new instruments, equipment rentals, rehearsal time, advertising costs, studio time, instrument repairs, printing fees, association fees, and even credit card processing fees might be deductible. If you’re self-employed in your business entity, you might be able to deduct things like health insurance premiums and home office deductions.
Another common deduction for musicians are costs associated with touring. Toll bridge fees, gas, lodging, mileage, and even some of your meals all fall under the “Business Travel” deduction category. Unfortunately, the IRS has strict requirements on what counts as a “tour” so be sure to discuss with a CPA experienced with tax rules for musicians beforehand.
One thing that is absolutely key when taking deductions is staying organized. You’ll need to keep track of all the expenses, what category they might fall into, and copies of all the bills, invoices, and receipts along the way. Your phone is a very helpful tool for this since you can just snag a quick (but CLEAR) photo of all these documents and then organize them into folders.
4. Don’t Go It Alone
As a musician, your focus should be on the music. Whether it’s strictly a hobby (and you’d like to keep it that way!) or you’re well on your way to a budding business, free up your headspace to focus on the song by having a music-loving accountant as a partner. At Orsini & Associates, we’ll make sure you’re set up to take advantage of all the tax credits available for you – and then we definitely will be coming to your next gig! Contact us today to discuss your musical future and how to best financially prepare for it.