After the storm or performances that take place during the year-end holiday season, musicians should take advantage of the slow-paced January to recover and plan ahead. One of the important things to include in all planning is the upcoming tax deadline in April. Although the music industry probably has zero touching points with the IRS, people’s earnings will be taxed just as relentlessly. This is why it is important to familiarize oneself with the basics of how tax filing works and what are the differences for musicians.
Meet the Self-Employment Tax
For those unfamiliar with how the world of financial services works, a blatantly simplified scenario would divide people into those who pay the self-employment tax and those who do not. The first group is employees working for someone who contributes one half of the Social Security and Medicare tax while the other half gets withheld from their paychecks. The second group must pay the entire portion of these two taxes themselves. Thus, besides the basic federal and state income tax obligations, people who work as musicians and perform “gigs” will have to be classified as self-employed if they make over $400 from their gigs in a year.
How much does one pay?
Unfortunately for most musicians, their knowledge of taxes does not have to be as thorough as that of professionals like Rusty Tweed. Still, when it comes to percentage cost of the self-employment tax, they should know that 15.3 percent of all their earnings must go to the IRS. This includes the 7.65 percent that employees normally pay and 7.65 percent that their employers contribute.
The Pay-As-You-Go System
Another rule that the IRS imposes is related to quarterly contributions. With people who work for an employer, their federal taxes get withheld as they earn money during the year. This is why the subsequent tax season is when a refund or additional payment will be due based on how much was already paid. Consequently, this means that self-employed musicians will have to pay taxes every three months if they expect to owe more than $1,000 at year-end. Such a rule enables the IRS to get money from people not working for a withholding entity. Then, if the quarterly payments add up to more than was actually owed, the person will get their money back via refund.
How does one file quarterly?
It is done using a form 1040-ES which stands for “estimated tax for individuals“. Naturally, the fact that the prepaid amount is based on an estimation of annual income means that this is a gray area. A useful tip is to predict earnings at the same or slightly higher amount than what was made in the year before. Also, numerous financial services like Turbo Tax and H&R Block can be useful to help complete the form and file it properly.
Keeping Track is Important!
The way that the IRS knows if someone has earned income that needs to be reported is through forms like W2 or 1099. For musicians, every gig should come with a 1099 miscellaneous form that shows how much was earned. This paper gets sent to the IRS by the party who paid the musician and it is sometimes sent to the musician as well. The rule, however, allows for the paying party to not send the form to the musician if they made less than $600 from the gig. This does not mean that taxes are not going to be applicable. It just means that the musician will have to remember exactly how much they earned so that they can self-create a 1099 form online. Therefore, keeping track is not only useful but almost obligatory!
How to maintain record?
One of the best ways is to utilize a simple excel spreadsheet. The musician can divide it into columns that have dates and amounts which will help know exactly how much they earned up to date. It will also show what income they received from certain parties and if they should be expecting a 1099 form from them.
Ah, the Expenses
If someone had to spend money buying a new instrument, getting transportation to their gig location, or any other thing that was reasonably related to making money in the music industry, they can subtract it from their revenues. Since the tax liability is derived from profit, the amount that one gets when all expenses are subtracted, every single cost should be well documented and reported. This means that receipts should be stored and used to fill out a Schedule C form that shows earnings and expenses before they are copied over to a 1040 personal return form.
Ultimately, there are hundreds of factors that play a role and one should look over the IRS guidelines before filing. Moreover, they should seek help from professionals who are as knowledgeable as Rusty Tweed and get their advice on the matter!