As a working musician, we often get paid by lots of people in lots of different ways. If you’re employed by a university, symphony orchestra, or other large institution you will get a W-2 in the mail after the new year describing how much you earned, what exemptions you claimed, and how much was withheld from your paycheck to contribute to your tax burden.
If you worked as an independent contractor, though, and earned more than $600, you will receive a 1099 that describes how much you earned from that contract. A copy of the 1099 is sent to the IRS by the person or company that contracted you, as well as to you so you can file it with your taxes. Because no money is withheld by the contractor, you are responsible for paying your own self-employment taxes which include your contributions to Medicare, Social Security, and Federal taxes.
While most employers have a human resources or payroll department to ease the distribution of tax forms to employees, it may take a little longer for you to receive your 1099s. This happens for a variety of reasons. Sometimes the contractor you’re working with is doing all of their own bookkeeping and is simply overwhelmed with the extra workload around tax time. Sometimes a contractor keeps poor records and is scrambling to get the necessary information to send you your 1099, or fails to do so completely leaving you in a 1099 limbo.
Don’t worry, though. There are plenty of things you can do in the meantime to prepare your taxes so that when Tax Day (April 17, 2018 this year) rolls around you are ready for your refund. Here are four ideas to help you prepare to do your taxes.
Realize that you are a small business.
This one is more about orienting your mindset around that of running a business rather than just making some spare change for personal spending.
Any time we make money from someone that is not an employer (i.e. they required you to fill out a W-4 form and likely an I-9 form and describe you as an employee) we are making money for our very own self-employed “small business”. You don’t need to fill out any forms, file any extra paperwork, or do anything special to begin being self-employed, you simply need to conduct business and you are now a Sole Proprietor! As musicians we do not need any licensing or special insurance to earn money so you are open for business essentially as soon as you accept your first paying gig.
When you make income as a sole proprietor the money you earn is reported on a separate page called a Schedule C and is attached to your tax filing form 1040. This is referred to as Schedule C Income. The Schedule C combines the tax burden of your business activities with your personal taxes. This means that your taxes will be rated according to the personal tax brackets.
Determine what expenses are deductible.
This one isn’t as hard as it sounds. Operating as a business can give you some tax advantages when it comes to deducting your business expenses. The IRS gives guidelines for business expenses and describes a deductible expense like this:
“To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.”
Here’s a fairly comprehensive list of tax-deductible expenses for musicians:
Books, magazines, music
Cabs, subways, buses/automobiles (only when traveling to gigs, not commuting)
Equipment and software
Film & processing
Instrument and equipment repair
Memberships (professional organizations like AFM)
Messengers, private mail carriers, postage
Music library: dvds, videos, records, tapes
Promotion and marketing
Studio/rehearsal space rent
Tax preparation/legal fees
Telephone/internet for business use
Meals and lodging while traveling for Business (50% deductible)
Home office: rent, gas & electric, insurance (this one is tricky, make sure you carefully read the IRS rules to ensure compliance)
While this list seems huge and all-encompassing, it is important that you consider if it is a personal expense or a business expense. Not all business expenses can be claimed as a personal expense.
There are, of course, exceptions to the rules and important details which you should learn and understand. The IRS website is a great source of info on this subject, check out their descriptions here: https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses
Organize your business-related receipts.
Now that you know what you can deduct, lets gather the receipts. If you don’t have a filing system for your receipts, or at least an envelope or baggie, you should get one. Another way to do this would be to scan your receipts into Evernote or Google Drive so they are all in one spot digitally. Download your receipts from Amazon, eBay, PayPal, and any other online vendors you’ve used to purchase things related to your music business. Save your email receipts and payment confirmations!
If you do your own taxes, you will simply list the expenses, or possibly just the total amount, onto your Schedule C. If you have a tax preparer do your taxes, do them a favor and make a spreadsheet with all of the expenses totaled in addition to your receipts. This is where digital copies begin to come in very handy. All of this can be emailed to your tax preparer in a single document and retained in perpetuity (IRS requires business documentation to be retained for at least 7 years. Do yourself a favor and at least keep all of your paperwork in good order!).
Calculate your mileage.
The IRS offers two ways of calculating the cost of using your vehicle in your business:
The Actual Expenses method or
Standard Mileage method
The Intuit TurboTax website has the clearest description of the differences between these methods. Here is an excerpt about the Actual Expenses method:
“As the name suggests, the Actual Expenses method requires you to add up all the money actually spent in the operation of your vehicle. You then multiply this figure by the percentage of the vehicle’s business use.
For example, if half the miles you drive are for business and half are for personal use, you will multiply your total vehicle expenses by 50% to arrive at the business portion (e.g. $9,500 total expenses x .50 business use = $4,750 business expenses).
Some of the costs you can include in your Actual Expenses are:
Maintenance (such as oil changes, brake pad replacements, tire rotations)
New tire purchases
Title, licensing, and registration fees (not deductible in all states; check with TurboTax to see if this expense is deductible in your state)
Vehicle depreciation (use a depreciation table to calculate the amount, and then deduct only the portion that applies to the business use of your vehicle)"
The Standard Mileage method is a much simpler way of calculating the business use of your car. It does not require you to track individual purchases and save receipts. Instead, you simply keep track of your mileage for the tax year. Once you have determined your business mileage for the year, simply multiply that figure by the Standard Mileage rate.
This is the method I use, and I’ve developed a simple way of tracking my mileage without a physical mileage log in my car. Here are the things you will need to track your mileage using the award-winning* Bernard Mileage Tracking System:
Open your new spreadsheet in Microsoft Excel, Google Sheets, or the Apple one. Label the top row like this:
PAYER | ADDRESS | ROUND TRIP | # of TRIPS | MILEAGE
Fill in the Payer column with all of the businesses who issued 1099s to you. Fill in their address in the next column. Next, pop open Google Maps (or your digital map provider of choice). Enter your address, then in the destination line enter the address listed on the 1099. When Google calculates a route for you it will display the one-way mileage of that trip. Multiply that distance by two to find the round trip distance and enter it into the next column. If you play more than one service at each location (which is likely if you are receiving a 1099) enter the number of round-trips you made during the year in the next column. Finally, multiply the round trip column by the # of trips column to determine your mileage for the tax year for that payer (you can set up a formula in the Mileage column to do this automatically). Take the sum total of the Mileage column to determine your overall Mileage for the year.
Multiply your overall mileage by the Standard Mileage rate (53.5 cents per mile for 2017) to determine your mileage deduction for the tax year. Whew!
While this method doesn’t account for any of the little trips or single gigs for which I won’t receive a 1099, it removes any guesswork surrounding my bigger gigs and doesn’t require me to have a physical mileage log in my car. It’s also approved by my tax guy! For the smaller gigs you can use the address listed on your contract or paycheck to calculate your mileage, but make sure you are reporting that income if you are deducting the mileage!
Hopefully this gives you a few ideas to keep you busy while you wait for your 1099s to roll in. At the end of the day, you may still end up qualifying for the standard deduction (For 2017, the standard deduction has increased to $6,350 if single; $12,700 if married filing jointly or qualifying widow(er); $6,350 if married filing separate returns; and $9,350 if head of household). However, getting an idea of how your taxes work is a valuable lesson that every musician and person should understand.
IRS.gov - Anyone who has an income should be comfortable searching the IRS website. The search function is good and the pages are succinct and descriptive. www.irs.gov
Intuit TurboTax - This website is a great resource for any questions regarding taxes. The "Freelancer's Guide to Taxes" page is especially relevant to self-employed musicians, as is the "Musicians Guide to Taxes: Top Tax Deductions."