Today, we talk about getting ready for the TAX MAN! For those of you who wait until the last minute and then stress a week before tax day, I am here to try to convince you to do a little at a time, STARTING NOW, so you don’t have to put yourself through the pressure next year. This blog just touches on a few important business and tax expenses I don’t want you to skip this year.
YOUR BIG BOX OF RECEIPTS
If you have a big box of receipts and then do NOT keep track of all your expenses on a computer program or even an excel file, get an easy accounting program like Quicken or Checkbook Pro, its like putting the details of all your expenses and income in a checkbook register. For now, my advice is to first separate your receipts into categories and before you those total those receipts and put them an envelop, check to see if any of your receipts were paid for with cash. ALL OF YOUR RECEIPTS COUNT!
Next, pull off your summary credit card statements from 2020. You may have bought equipment or have music subscriptions that will count towards your final business expenses. Every expense is subtracted from the amount of your income which determines how much you need to pay for taxes.
I hope none of you are delivering your box of receipts to your tax person or CPA, because most CPA’s cost $85 an hour and a regular bookkeeper $30 an hour. PLEASE to do this yourself to save a bunch of cash!
There are so many expenses you can take as a musician that many of you are not aware of. See our list below.
Let’s start with income. If you have filled out a W9 before you received a payment for performing or your music service, you most likely have received a 1099. Any business that pays you the total of $600 a year, will issue you a 1099 so they can take that amount off their taxes. The same goes for you!
If you pay your computer person over $600 a year, you need to issue a 1099 MISC from yourself. You can buy the forms at an office supply store like Staples or Office Depot. It is really simple. You put your name, address and social security number or EIN number and the same information for the person you are paying. Deadline for these are January 31st, but you have a few weeks into February to get them sent out. You also send the summary form to the IRS.
If you get paid royalties, or you pay royalties to anyone, you MUST send a 1099 even if you pay someone 1 cent. Royalties are taxed a little higher than regular income mostly because it is payment for 6 months or longer in the past. It does not matter that we have no way to get those payments sooner from your ASCAP OR BMI…the IRS has spoken.
I hope many of you applied for unemployment as a gig worker (self-employed) and you got it! Just for 2020, the first $10,000 of income from your unemployment take home will NOT be taxes. This about one of the few positives coming to us because we experienced the pandemic.
For those of you that kept doing some work and your employer is taking taxes out of your pay, that will only help you possibly get a refund after you apply all your business expenses to your gross income. Your TOTAL INCOME minus ALL YOUR EXPENSES will = your NET INCOME. It is your NET INCOME total which will determine what tax percentage you fall into.
Uncle Sam trusts you to declare ALL your income including any tips that come your way. That means all the tips or donations you got from doing virtual concerts, you will have to declare as income. So print out the summary of your incoming money from PayPal and Venmo and put that down as income.
How will the IRS know you received those payments? Well, if you are audited, they can look at your bank statements and ask where did this incoming cash came. DECLARE IT! The penalties for misrepresenting your income is not worth the possibility of getting away with it!
All your stimulus payments from COVID are NOT taxable! HORRAY! Also, if you did not receive your stimulus payments in 2020, you can declare you did NOT receive those and get a credit or a refund towards your taxes for 2020.
Most of you are independent contractors as a musician, engineer, video production editor, session player…etc. That means you do not have a regular employer taking taxes out for you every week. That does not excuse you from NOT paying all the federal, social security, medicare and state taxes that will be due at the end of the year.
I have seen experts suggest saving 15% to 30% of your income so you can pay your taxes. I know that sounds like a lot! You will be paying more taxes depending on what tax bracket you fit in. Here are some general numbers. If your income after expenses is up to $40,0000, you are in the 12% tax category. Up to $85,000 is 22% and from $85,000 to $163,000 you are in the 24% tax percentage….32% up to $326,000. If you made over that after the COVID year…. congratulations!
SUGGESTION: I personally suggest saving 15% to 18% just to make sure you have enough money. If you have some savings left, you can put that toward a down payment on a new car or put money away for the future in an IRA account. SO…. PUT SOMETHING AWAY AT LEAST EVERY QUARTER!
There are so many business expenses many musicians are not aware of that can change their bottom line and, in turn, decrease their yearly taxable income. I have a big list at the end of the article, but let’s look at some of the expenses I think musicians may forget to count THIS year.
Home Office/ Home Studio: If you have a separate room in your house that you use as an office or a new studio, you can get a home office deduction. Basically, it is $5 per square foot or a percentage of your total home size divided by the number of rooms. Maximum deduction is $1500. I know many of you started a home recording studio this year, so as long as that equipment is NOT sitting in another home space like a dining room, declare it!!
The only other exception is if you are paid as a regular employee and were forced to work at home because of COVID. If your employer is declaring and paying you as W2 employee, taking taxes and still providing benefits like health insurance or retirement, the home exemption can NOT be taken. If you continue to work from home and your employer eliminates the office for good, this is a discussion you should have and it’s important for you to watch possible new tax rules for 2021.
Recording costs & equipment: Many of you have re-invented and are now trying to write for TV, film, advertising OR have bought lights, cameras and recording devices for virtual online presentations OR bought additional recording devices to record your own personal music projects. All of those purchases will count as business expenses even though you may not be making any income from your efforts yet. Don’t forget what you purchased and put on your credit cards! You may not have paid it off yet, but you can take the business expense for 2020.
Education/Trade Shows: Some of you missed the NAMM show or a trade show or convention you go to every year because of COVID. BUT if you paid for any membership and even a ticket price to attend a virtual event….these are true expenses.
And I don’t know about you, but I have attended many free webinars to learn some new program that have lead to signing up to online course to learn something new….all of those items you paid for are education expenses. Just make sure to keep a receipt …it is as easy as taking a screen shot of the course and making a note which credit card you used to pay for the learning experience. Even smaller programs that don’t cost much like from UDEMY….these all count as paying for education to advance your music skills.
Just one note about attending music business conferences and trade shows. This year those were all virtual but next year, if you attend in person, have to pay for a membership to be part of the event, have to drive or fly to the location and pay for a hotel & food….all of those are write-off business expenses.
Subscriptions: This year your membership and subscriptions may be higher than ever since we are doing our own graphics, branding and music releases. All those monthly subscriptions like WeTransfer, Canva, Zoom, Twitch, StreamYard etc, can seem to nickel and dime you to the point where you are wondering where all your money is going.
Yes, we need these programs but about every 6 months or, at least, yearly, check your credit cards, paypal and bank accounts to see if you are still really using those monthly fee based programs. At this years tax review, I found a number of monthly fees that my music clients were not using and that we cancelled and saved a few hundred dollars for 2021.
Also, if you started working on music to place in TV/Movies/Gaming, that means those subscriptions to netflix, Prime Video, HBO and even payments to see streaming a new movie, are all part of your education. Is that really an expense? It sure is!
Technology: I am going to lump a lot of items here. Buying new computer, inputs, music or recording oriented programs, more memory for your computer, new lighting, microphones, cameras ….etc are all related to you being a musician, so they are business expenses.
Updating your websites, hosting and even upgrading your internet service so you can stream on You Tube/Facebook are legit expenses for your business. Next, don’t forget about your cell phones. If you only have one phone, you can take about 80% of the total phone cost as an expense. If you still have a landline, you can either take 100% of your landline or 100% of your cell for business and use the other as your personal usage.
Sales-Merchant fees: Many of you may have had sold merch or had someone tip you on paypal and a business/transaction fee was taken off because you are a business. Those fees are a cost of doing business and you can take all those fees as an expense.
So these are just some of the tax write-offs for your taxes this year. Take a look at the other list below to help you with your 2020 business expense list. Just always remember to keep a receipt; sometimes just showing a line from a credit card will not be enough that you paid to upgrade your Apple computer or bought an interface from Sweetwater.
Please consider finding a simple computer program and entering that information, every other week or monthly, so you can have a better grip on receipts for your taxes for 2021! You will be so glad you did. And PLEASE promise me you will not just use turbo tax or H&R block to do your taxes if you have many expenses. Only a person experienced with working with entertainers, will know the new and old rules for musician exemption.
OTHER EXPENSES YOU MAY MISS AS A MUSIC BUSINESS OWNER
- Advertising costs
- Bank service charges
- Business association or membership dues
- Business gifts
- Business magazines-books-(education items)
- Casual labor and tips
- Coffee and beverage service (employees 50%)
- Computer-programs & internet
- Consultant fees & business education
- Credit Card merchant fees
- Home office deduction & utilities
- Legal and professional services
- Memberships and music subscriptions
- Office supplies & equipment
- Parking and ground transportation (uber-taxis-long term airport park)
- Performer expenses (image, gym, clothing, make up..etc)
- Reimbursed business for employees
- Repayment of previous recorded income
- Technical/internet: including software, assistance, website, socials
- Trade show expenses (include travel-meals-lodging)
- TV-Movie tickets (declare as education if you are in that business)
SO MUCH MORE…ASK YOUR TAX PROFESSIONAL!