Are you a self-employed musician?

The criteria for self-employment as a musician

For tax purposes, self-employment refers to earning income from working for yourself as a freelancer, independent contractor, or business owner rather than as an employee. As a self-employed individual, you are responsible for paying your own taxes, including self-employment tax, which is a combination of Social Security and Medicare taxes.

To be considered self-employed for tax purposes, you must generally meet the following criteria:

• You make money playing music as a sole proprietor, independent contractor (1099 contractor), or, in rarer situations, as a member of a partnership.
• You are not an employee and do not receive a W-2 form from an employer. For example, if you perform for a church band or an orchestra that pays you via a W-2, then you are an employee, even if it is part-time.
• You have control over how the work is done, including what tools and equipment are used and where the work is done.
• You are responsible for the success or failure of your business.

If you are self-employed, you will need to report your self-employment income and pay self-employment tax on your tax return. You may also be eligible for certain tax deductions and credits, such as deductions for business expenses and credits for education expenses. It's important to practice accurate record-keeping throughout the year and seek professional advice if you have any questions about your tax obligations as a self-employed individual.

Tracking income and expenses

How to track income from gigs and other sources

Consider tracking income from gigs and other sources in order to accurately report earnings on tax returns and to have a clear understanding of your financial situation. Important information to record includes: 

• Source of income
• Gig income, merch sales, and any other sources of income such as teaching or session work
• The date you received that income
• Documentation of that income
• Invoices, contracts, receipts

Use free tools like Google Sheets or Green Room or paid accounting software like QuickBooks to help with this process. Accurately recording income throughout the year will make it easier to complete your tax return and ensure that you are reporting all of your income accurately. It's also a good idea to seek the advice of a tax professional if you have any questions about how to report your income.

How to track expenses, including deductions for musical instruments and equipment. 

Make a list of all the expenses you incur as a musician, including gig-related expenses such as mileage records and lodging, as well as business expenses such as musical instruments and equipment. As with income, it's important to be thorough. You will want to make note of: 

• Source of the expense
• Equipment receipt, gas receipt, studio session invoice for an engineer
• The date you paid that expense
• Documentation of that expense
• Invoices, contracts, receipts, etc.

Just like with your income tracking, there are software tools that can help. One extra wrinkle for expenses is that some are tax deductible. Not sure what counts as a deductible expense? Check out this article on common tax deductions for self-employed musicians.

Tracking expenses is an important part of tax preparation for self-employed musicians. Accurately recording expenses throughout the year will make it easier to complete your tax return and ensure that you are reporting all of your expenses accurately. It's also a good idea to seek the advice of a tax professional if you have any questions about how to report your expenses. 

Issuing 1099s to bandmembers or other service providers

You may need to issue a Form 1099-NEC to other individuals or businesses if you have paid those individuals or businesses more than $600 in a tax year for services performed as a nonemployee. For example, if you had the same bassist play seven, $100 gigs throughout the year, you need to issue them a 1099-NEC. Or if you hired a session musician to play on your album and paid them more than $600, you need to issue a Form 1099-NEC to the session musician. If you used a service like Fiverr or Upwork, they take care of these forms, but if you are paying directly, not through a freelancer marketplace, it is your responsibility to handle tax forms. 

A note on the importance of keeping receipts and other documentation

Keeping receipts and other documentation is important for musicians when filing taxes because it provides evidence of the income and expenses you are reporting on your tax return. Receipts and documentation can help to verify the accuracy of your tax return and can be used to support deductions and credits that you claim. If you are audited, having receipts and documentation can help you to demonstrate that your tax return is accurate. It's a good idea to keep receipts and documentation for at least three years in case you are audited or need to verify information on your tax return.

Tax deductions and credits for musicians

By tracking your expenses properly, you will be able to determine which expenses are tax deductible. You can claim a number of tax deductions for your business expenses.

These can include capital expenditures such as musical instruments and equipment, as well as ongoing expenses like rent for practice and recording space and travel costs for gigs. You can also claim deductions for meals and entertainment expenses that are directly related to your business, as long as they meet certain criteria. 

We go over dozens of examples of deductible expenses and how to understand business expense criteria in this blog post on useful tax deductions for musicians and bands.

Filing taxes as a self-employed musician

Overview of the tax forms and documents needed

As a self-employed musician, you will need to file your taxes using a different set of forms than those used by employees. Here are the tax forms and documents that you may need to file your taxes as a self-employed musician:

1. Schedule C (Form 1040) or Schedule C-EZ (Form 1040): These forms are used to report your business income and expenses. You will use Schedule C if you have business expenses that exceed $5,000 or if you have any loss from your business. Schedule C-EZ is a simpler form that can be used if your business expenses are less than $5,000 and you have no net loss.
2. Self-Employment Tax Form (Schedule SE): This form is used to calculate and pay self-employment tax, which is a combination of Social Security and Medicare taxes that self-employed individuals are responsible for paying.
3. Form 1099-NEC: If you received more than $600 in income from any single source during the tax year, you should receive a Form 1099-NEC from that source. You will need to report the income shown on the form on your tax return. For example, if a venue paid you more than $600 in a year they should issue you a Form 1099-NEC. 
4. Receipts and documentation: You should keep receipts and documentation for all of your income and expenses. While you don't file this with the IRS they are useful in case you are audited or need to verify the information on your tax return. 
5. Other forms: Depending on your specific circumstances, you may need to file additional forms, such as Form 4562 (Depreciation and Amortization) to claim deductions for business assets like musical equipment, or Form 8829 (Expenses for Business Use of Your Home) to claim the home office deduction.

It's a good idea to consult with a tax professional or use tax software to ensure that you are using the correct forms and reporting all of your income and expenses accurately. Filing your taxes is a situation where spending a few hundred dollars to ensure you are filing correctly can help you save by maximizing your tax deductions and minimizing your chances of getting audited down the line!

Tips for simplifying the tax preparation process

Our number one tip is to do it as you go. By keeping track of your income and expenses as they occur, you can avoid the last-minute rush to gather documentation and fill out forms. If you are reading this in January for the current tax filing year, this ship may have sailed. But in addition to working on your tax return, now is the time to be thinking about making the process easier for next time. Here are some additional tips. 

1. Use business management software like Green Room: Using a business management tool can make it easier to track income and expenses and understand financial health. Green Room is one option built specifically for live entertainers.
2. Seek professional advice: If you are unsure about how to report your income and expenses or have questions about tax deductions and credits, consider seeking the advice of a tax professional. A tax professional can help you to understand your tax obligations and to prepare your tax return accurately.
3. Gather all necessary tax documents: Make sure you have all of the necessary forms and documentation, such as receipts, bank statements contracts, and invoices, before you start preparing your tax return. This will help to ensure that you are able to accurately report your income and expenses.
4. Plan ahead: We said it before, and we'll say it again! To avoid the stress of last-minute tax preparation, start gathering your documents and preparing your tax return as early as possible. This will give you plenty of time to seek help if you need it and to review your tax return before it is due.

By following these tips, you can simplify the tax preparation process and ensure that your tax return is accurate and complete.

Your options for filing taxes for your music business

There are several options available for filing taxes as a musician, including hiring a professional or using tax software. Here is a brief overview of each option:

1. Hiring a professional: One option is to hire a tax professional, such as a certified public accountant (CPA) or an enrolled agent (EA), to prepare and file your tax return. A tax preparer can help you to understand your tax obligations and to claim all of the deductions and credits that you are eligible for which can maximize your tax savings. However, hiring a professional can be costly and may not be necessary if you have a simple tax situation. Bonus: paying for a professional service like an accountant is a tax-deductible expense.
2. Using tax return software: Another option is to use tax preparation software to file your taxes. There are many different software programs available, ranging from free options like TurboTax to more expensive options like H&R Block. Tax software can be a good option if you are comfortable with preparing your own tax return come tax season and have a basic understanding of the tax code. Many software programs offer step-by-step guidance and support to help you through the process.
3. DIY: If you feel comfortable preparing your own tax return and have a simple tax situation, you may be able to file your taxes on your own using forms and instructions provided by the IRS. This can be a good option for those who are on a tight budget or who want to have complete control over the process. However, it's important to make sure you understand the tax laws and have all of the necessary forms and documentation before you begin.

Ultimately, the best option for filing taxes as a musician will depend on your specific circumstances and needs. Consider factors such as your tax situation, budget, and comfort level with preparing your own tax return when deciding which option is best for you.

Conclusion

Filing taxes is not the fun part of being in the music business, but it is necessary. Taking the time to educate yourself about the process and how deductible business expenses can lower your taxable income is an important part of the process of ensuring your tax payment is accurate and not higher than necessary. If you are still feeling overwhelmed, it is worth finding a professional to answer your accounting questions. We hope you find this tax prep guide for musicians useful and would love to hear any feedback you have!

Disclaimer: We have done our best to ensure the accuracy of the information in this and all other blog posts on our website. Our posts are meant to help educate and do not constitute legal, financial, or tax advice. 

FAQs

Is my music a hobby or a business?

A hobby is something you enjoy doing for fun. As a hobbyist, you make money from hobbies. If you're making money from your hobby, you'll owe taxes. The critical difference between filing your taxes as a hobbyist and as a business is that a hobbyist is all but expected to lose money. A business operates with the intent of profit, even if it takes a few years to become profitable. Because of this, the IRS allows businesses to claim a loss on taxes while the lowest a hobbyist can go to is zero.

For example, if you are a gigging musician making $15,000 a year and a teacher making $50,000 a year and you spent $20,000 on music expenses filing as a hobbyist would be filing with an income of $50,000. Filing as a business, and properly deducting expenses would put your taxable income at $45,000.

Whether you are operating at a profit or a loss it is more advantageous to be filing as a business than a hobbyist in order to claim all legitimate expenses. If you are unsure how to transition from a hobbyist to a business, check out this post on business entities for musicians.

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Photo by Kelly Sikkema on Unsplash