Navigating the realm of taxes is a crucial yet complex task for music professionals. Whether you're a seasoned musician, an emerging artist, or run a record label, understanding tax obligations and opportunities is essential.
This comprehensive guide aims to demystify music taxes filing essentials, and strategic financial practices to bolster your music venture's financial health. As you traverse the melodies and harmonies of the music industry, let this guide be the rhythm that orchestrates your tax management, ensuring a sound financial footing in your musical journey.
Music Tax Filing Essentials - Deductions, Business Formation, and Common Misconceptions
Musicians with strong musical foundations can better understand what they play. With filing taxes, knowing the basics can help you with a lot of understanding of them.
To understand them, it helps to know the goal of tax filing: saving as much as possible by being strategic. For example, deductions allow you to save on your taxes. Read our article on write-offs for DJs and producers with more help on deductions. Later, you'll learn more on deductions.
For now, let's address some common questions related to music taxes.
When do you need to pay taxes on music?
Anytime you make more than $400, musicians need to pay self-employment tax. If you are a business owner (not self-employed), you need to file your taxes, regardless of how much you make.
The self-employment tax is 15.3% of income earned from your music business (it doesn’t includes income from other sources, such as investments). This tax is in addition to income taxes.
As a music business professional, you must make quarterly payments if you expect to owe more than $1,000 when filing your tax returns. Whether you're self-employed or a business owner, those dates remain the same:
- April 16th
- June 15th
- October 15th
- January 15th
Pro Tip: Self-employed musicians need a Schedule C from Form 1040 to get started. For other business types, you'll need other kinds of tax forms.
What's the best business formation for music businesses?
When choosing the best business formation, it’s important to distinguish between legal entities and tax entities. Legal entities include LLCs, corporations, LLPs, and others depending on the state where you registered the business.
You don’t need to form a legal entity in order to file a tax return for your music business. However, your choice of legal entity can impact how your business files its tax return. Each tax entity files its own type of tax return. Here is some general guidance:
- Single musicians just starting out shouldn’t form a legal entity early on, as it adds unnecessary expenses and generally won’t provide tax benefits. As an unincorporated sole proprietorship, you’ll file taxes on your personal tax return.
- For one person at the head of a band, record label, or other well-established music business, consider forming an LLC. The LLC will provide legal protections that are essential when making contracts with third-parties. You'll report the LLC’s income as a sole proprietorship on your personal tax return.
- For multiple owners working together in the music business, consider forming an LLC for the legal benefits. You’ll then file a separate business tax return. Each partner then reports their share of the LLC’s income on their personal tax return. Also consider forming a corporation, if you’d like to avoid reporting the income on the owners’ personal tax returns.
There’s a common misconception that LLCs are automatic tax savers. But here’s the truth: LLCs by themselves do not provide tax benefits, these business types provide legal benefits.
LLCs are pass-through organizations. This means that an LLC’s owners must report the LLC’s income on their personal tax returns, even if the LLC files as a partnership.
How can different formations affect your music business taxes?
Broadly speaking, the business type with the most potential tax benefits in the music business is an S Corporation, which is a tax entity election that an LLC or corporation can make with the IRS S Corporations are beneficial because they avoid the double taxation of a C-Corporation and the self-employment taxes of a sole proprietorship or partnership.
Sole proprietorship LLCs, partnerships, and unincorporated individuals are all taxed on the personal level. The owners must pay self-employment taxes on this income.
You could form a corporation to avoid self-employment taxes. But that corporation would file its own tax return and pay taxes on the income. You’d then pay taxes on your personal tax return for any distributions.
By setting up an S-Corporation, you avoid both double taxation and self-employment taxes.
So why isn’t everyone running out and starting S-Corporations? Because the tax benefits of this tax entity really depend on a variety of factors. The costs of setting up and running an S-Corporation might outweigh the tax savings due to phase-outs and deduction limitations that apply to business owners in the music industry.
Furthermore, not all businesses are eligible. To form an S-Corp, you need to be a domestic corporation with fewer than 100 shareholders and have one class of stock. You also need to only have allowable shareholders that include individuals, some trusts, and estates. Shareholders must be U.S. citizens or residents.
To form an S-Corporation, it’s also best that you already have a well-established business. Those just starting out should stick to a sole proprietorship, partnership, or self-employed status.
Below is a simple worksheet guide showing you the different basic tax forms you’ll need to get started:
- Sole proprietorships and self-employed people Schedule C from Form 1040
- Partnerships will need a Form 1065
- C-Corps need Form 1120
- S-Corps will need Form 1120-S
These forms give you some idea about how complex things can get. But there are many more tax forms you likely will run into when running a business.
Other Common Misconceptions About Music Taxes
LLCs are just one common assumption people make in reducing your taxable income. Here are some other misconceptions professional musicians and their business associates might have:
- All expenses are deductible: Not every expense incurred is tax deductible. It must be both ordinary and necessary for the music business.
- Hobby income is not taxable: Income from music, even if it's a hobby, is taxable.
- Home studios are always deductible: Home studio deductions are subject to strict IRS rules.
- Only full-time musicians can claim deductions: Part-time musicians can also claim business-related deductions.
- Self-employment tax doesn't apply: Music professionals are subject to self-employment tax on their net earnings.
- You don't need to report cash payments: You must report cash income to the IRS
Keep these misconceptions in mind anytime you're spending money, making money, or working with a tax preparer. Of course, if you want to save money using tax rules, deductions are your friend.
8 Unique Music Business Deductions for Your Tax Return
In filing taxes, every bit of savings counts. Being in the music industry provides unique opportunities for deductions other industries don’t have. Understanding these unique deductions can lower your taxable income, ensuring more money stays in your pocket.
1. Musical Instruments and Equipment
If you've purchased musical instruments, equipment, or software for your music business, they apply as business expenses. Keep all receipts and records of these purchases to make the deduction process smooth and straightforward.
Since it's a usable asset, you'll be able to take the entire expense as depreciation upfront. This upfront depreciation applies as Section 179, saving you a lot with more expensive instruments and musical equipment.
You can also choose to expense software that might include tools like GarageBand, beats for FL Studio, or other kinds of digital instruments.
2. Professional Studio
Whether renting or owning, you can expense off the costs of a professional studio. But like most music careers, you might end up having an at-home studio.
If you have a home studio, a portion of your home expenses, such as rent, utilities, and maintenance, is usually deductible. However, you need to ensure that you only use the area for your music business to qualify for this deduction.
The home office deduction provides two sets of rules:
- The simplified method is $5 per square foot (up to 300) and
- The regular method lets you take a percentage of home expenses based on the time you use your home only for business.
For more info, check out our deep dive on the home office deduction for music industry professionals.
3. Professional Development
Investing in your musical skills? Expenses for music lessons, coaching, and workshops are usually deductible as well. This also includes any fees for conferences or seminars that help enhance your music business knowledge and network.
What counts as professional development might change depending on the person. For example, a marketing professional could not justify taking lessons to get better at playing music. Keep in mind that any development must be ordinary and necessary for the business.
4. Travel Expenses
Did you go on a tour or have gigs out of town? You can deduct travel expenses including lodging, meals, and transportation. Keep a detailed record of all expenses incurred during your travel for music business purposes.
5. Marketing and Promotion
Costs for marketing and promotion, such as website maintenance, advertising, and promotional materials, are also deductible. This includes the cost of producing music videos, photography, and other promotional content.
Every musician, record company, and business professional needs to market their business. If hiring outside support, you'll need to provide the specialist a 1099 form if you paid them at least $600.
6. Booking Fees
An artist's booking fee is the smallest amount an artist will accept to play at a show. If you're a booking agent in the music business, you'll need to be aware of these booking fees to know how much you'll need to pay to bring in prominent artists.
On the other side, self-employed musicians and artist managers will need to establish this minimum booking fee. For more information, check out our article on how to calculate a minimum artist booking fee.
7. Miscellaneous Costs
Other expenses like membership fees for music organizations, subscription services for music platforms, and costs related to copyrighting and protecting your music can also be deducted. Here are just a few examples:
- Business license and insurance
- Vehicle repairs
- Office supplies
- Manufacturing costs (When Creating Merch)
- Legal cost (such as ensuring you are paid proper royalty checks)
Need more help with your music taxes? Contact Augur CPA for specialized tax planning and advice tailored for music professionals.
Documentation and Organization Strategies
Proper documentation and organization are the backbone of effective tax management, especially for music professionals who often juggle multiple income streams and expenses. Here’s how you can keep your financial affairs in tune:
Receipt Management
In the world of taxes, receipts are golden. They serve as proof of your expenses, which is crucial for claiming deductions. Develop a habit of keeping business-related receipts, and consider using digital tools or apps that can scan, store, and organize these receipts for you. This practice not only makes tax filing easier but also prepares you in case of an audit.
Digital Tools for Organization
Leverage digital tools and software designed for financial organization. Many of these tools can link with your bank accounts and credit cards, automatically categorizing and tracking expenses, and providing a clear, real-time picture of your financial situation. They can also help in generating financial reports, making it easier to analyze your finances and plan accordingly.
Regular Financial Review
Set aside time for regular financial reviews. This practice helps in keeping you informed about your financial health and allows you to make timely adjustments to your tax planning strategies. Regular reviews also aid in identifying any discrepancies or issues, allowing for timely resolution.
Work with a Professional
While it's essential to be actively involved in your financial management, working with a tax professional or accountant who understands the music industry can be invaluable. They can provide guidance, ensure compliance with tax laws, and help optimize your tax situation.
Conclusion
Navigating the world of music taxes may seem like a daunting symphony of numbers, forms, and regulations. However, with the right knowledge and strategies, you can conduct your financial affairs with confidence and precision.
To recap, it's crucial to understand the basics of taxes as a musician or related professional. Whether you're a sole proprietor or a self-employed music mogul, music-related taxation differs in some ways. For example, pursuing music professionally offers unique deductions available to professionals, including expenses for instruments, equipment, home studios, professional development, travel, and marketing.
Proper documentation and organization are paramount. Embrace digital tools for receipt management and financial organization, and ensure regular financial reviews to stay on top of your financial health. Deduction planning is an ongoing task, and staying informed and organized will help you maximize your tax savings effectively.
Remember, the realm of taxes is full of opportunities for savings, and staying vigilant in seeking these opportunities will ensure your music venture remains financially sound and thriving.
CTA: Ready to hit the high notes of tax savings? Contact Augur CPA today.
FAQs
Can I deduct the cost of concert tickets or music streaming subscriptions?
Concert tickets and music streaming subscriptions are personal expenses and are usually not deductible. However, if you can prove that you directly related these expenses to your music business, such as market research or professional networking, they may be deductible. Maintaining good records is crucial when differentiating what’s a business vs a personal expense.
Can I deduct clothing purchases for performances?
Clothing used only for performances and not suitable for everyday wear can be deducted as a business expense. However, everyday clothing, even if worn for performances, is not deductible.
Are royalties from music streaming platforms considered taxable income?
Yes, royalties received from music streaming platforms are considered taxable income and must be reported on your tax return.
I teach music lessons. Can I deduct the cost of sheet music and other teaching materials?
Yes, the cost of sheet music, teaching materials, and other supplies used only for your teaching activities can be deducted as a business expense.
Can I deduct travel expenses for a non-paying gig?
Yes, travel expenses for a non-paying gig can be deducted as long as the gig is for business promotion and not a charitable event or a hobby.
I received a grant for my music project. Is it taxable?
Grants are generally considered taxable income unless they are explicitly classified as non-taxable by law. It's essential to report grant income on your tax return.
Can I deduct the cost of hiring a manager or agent?
Yes, fees paid to managers, agents, or other professionals for services related to your music business are deductible expenses.
Are donations to my music project tax-deductible for the donors?
Donations to individual artists or projects are generally not tax-deductible for the donors unless made through a registered non-profit organization.
