For those who have just begun playing music professionally, or semi-professionally, the idea of figuring out your taxes can be daunting. Don’t worry, though: at the end of it all, given the profession you’ve chosen, it’s not likely you’re going to owe much. If you find that you do owe a lot in taxes on your music income, even after taking all the allowed deductions, may I please join your band?
There are two schools of thought among people in the music field when it comes to preparing your taxes:
School of Thought #1 (closed this week for spring break, by the way):
Claim as little as possible by getting paid as often as you can in cash, or in trade for goods, services, root vegetables, or moonshine. If an IRS auditor asks how you’re managing to live on an annual income of $114, just reply, “I guess I’m just kind of thrifty, like my Uncle Pete always was.” Then launch into a long and painfully dull story about Uncle Pete, scaring away the government official forever. This was Al Capone’s preferred method, minus the Uncle Pete story.
School of Thought #2:
Claim everything you earn, but also deduct everything you legitimately can. Then if an IRS auditor asks how you’re managing to live on an annual income of $114, just reply, “It ain’t easy, pal” (note: only some IRS agents enjoy being called “pal”; use with caution).
I recommend School of Thought #2, but of course it’s your choice. This is the above-board option (i.e. the one that isn’t illegal), and as I implied above, the bottom line is going to be similar. This more honest method is only problematic if you A: fail to claim the deductions that are available to you, B: keep no records whatsoever, or C: add where you should be subtracting, or worse, multiply where you should be subtracting (you’ll know you’re doing this when you come up with a net income of $342,000,000 after playing only nine bluegrass festivals last year).
Some of you may be glazing over at this point, thinking to yourself, “I don’t even really need to file taxes on my music income: it’s just going to be a loss anyway.” This, more often than not, is just wishful thinking (the filing taxes part, not the loss part). If you take in $400 or more in gross self-employment income in a year, you have to file for that, even if deductions put your net income at minus $900.
Whether or not you decide to use a professional accountant, some form of tax software, or you just do it the old fashioned way by counting up figures on your fingers, then writing the numbers down on the form yourself, you’re going to need to keep records of some kind. Most accountants aren’t that impressed with, “oh, about 18,000 or so” as a definitive statement of your income, and just guesstimating numbers yourself on a government form isn’t such a good idea, either. Just get in the habit of jotting a few things down here and there throughout the year.
Save receipts. That’s a given. When it comes to what to do with those receipts, though, there are a few different approaches:
You can pay for deductible expenses with a credit card, then download and classify the expenses using some kind of financial computer software. Then your receipts can all be dumped into one place, like a shoebox, or maybe one of those pumpkin-shaped Halloween candy containers, or maybe an actual hollowed-out pumpkin. They’re only going to serve as a backup.
The more tedious method (which I used for years, because I have a secret love of the tedious) is when this time of year rolls around, dump out all the receipts somewhere, like the floor, and arrange them into separate piles based on expense category (for example, strings, picks, and other supplies go in one pile, the tickets to go see Ralph Stanley (those are deductible) go in another, etc. Then total the receipts from each pile. After about 7 hours of this, scream loudly, then lie face down, beating the floor with your fists. Whatever you do, though, don’t think you can quit for a while and resume the following week, because then you’ll have to walk around your little piles of receipts all week long, trying hard not to move or disturb them. You might even trip and injure yourself, and then who would do your taxes, or play your next taxable gig?
The slightly less professional method is to keep the receipts in their container, then just take a guess at what your expenses were, and hope they match up, never actually looking at any of the receipts. A friend of mine was fond of this method, and he said, “if the IRS doesn’t like my tax return, I’ll just dump my receipts out for them in a big pile and say, “okay, you figure it out.” This shows a fundamental misunderstanding of how government agencies operate.
Once you keep these receipts, you should hold on to them for several years. Put them somewhere they’ll be well-preserved and won’t get damaged or lost. Contrary to popular belief, it’s not necessary to can or pickle your receipts, though I’m sure if you choose to go this route, somewhere on YouTube there’s a tutorial on how to pickle tax receipts. Just keep them dry and away from the dog.
Some people ask the following question: “I totaled up all my expenses, and my taxable income was less than zero. How come I’m not getting a refund check?” The answer is simple: you still have to actually pay something in to get something back, hence the word refund. People that get refund checks generally had that money withheld from their paychecks throughout the year, thanks to their real jobs (you’ve probably read about those; they involve getting up before 10:00 a.m.). Or, self-employed people, (musicians included) might have made quarterly payments to the U.S. Treasury, but overpaid, and are now getting some back.
If you just like getting a check from the U.S. Treasury in the summer, you can always make quarterly payments and overpay on purpose. Or, just write yourself a check, then mail it to yourself sometime in June. It’s almost as satisfying.
Finally, if you had a good year, and you do end up owing something to the government after filing your return, never send CDs or band T-shirts to the IRS as a substitute for money. They frown on that.