Music and Taxes: What Every Musician Needs to Know to Pay Less and Save More
“Hey, I’m a musician! Do I really need to pay so much in taxes?!”
Working with a variety of artists as we do, we find that despite their different musical profiles and goals, concerns about taxes are one thing that all musicians have in common. So we thought we’d put together answers to some musician tax FAQs, as well as tips and tools for musicians looking to optimize their tax payments and savings.
Disclaimer: This article is not a substitute for professional advice from a certified tax preparer, CPA or lawyer. Its intention is to provide helpful hints to musicians on how they can cope better with tracking and reporting income and expenses related to music, so they can get to keep more of their hard-earned money.
“Money Changes Everything” – When Music Attracts Tax
The IRS considers income from music to be taxable if profits (income minus expenses) exceed $400. This includes earnings from composing, performing or producing music, music-related product sales (tracks, albums, promotional merchandise like souvenirs and clothing), royalties and licensing fees.
Even artists who’re clear that they’ve got to pay tax are often unhappy at the steep rate levied by the IRS. And while we agree that 15.3% isn’t exactly ‘peanuts’, it helps to get a better sense of the bigger picture.
In 2021, the federal self-employment tax rate is 15.3%, compared to only 10% income tax for employees earning up to $9,950. However, income tax climbs steeply for higher wages: 12% for $10K to $40K, and 22% for over $40K, whereas self-employment tax rate holds at 15.3% all the way up to $142,000!
Most importantly for musicians, the 15.3% tax is calculated on net income, in other words, income after music-related expenses have been deducted. With a bit of savvy and smart planning, artists can offset a tidy proportion of their expenses against their total income, bringing down the amount of tax they need to pay by a significant amount!
First, let’s take a look at the tax forms that musicians have to deal with, so we have a clear understanding of the things an artist needs to plan for in order to file taxes.
“Taking Care of Business” – Tax Forms for Musicians
There are a bunch of tax forms that artists might need to deal with at different times, depending on their professional situation and the type of income being reported. Here’s a summary of the most important ones:
1. Form W-4 and Form W-2: Employee Musicians
If you’re a musician employed by an individual or organization, chances are that you’ve already filled out a W-4 to let your employer know the correct amount of federal income tax to withhold.
The revised form W-4 (from 2020 forwards) doesn’t allow ‘personal exemptions’, but you can still claim allowances based on the number of your dependents, professional expenses listed on Form 1040, as well as medical expenses amounting to over 7.5% of your total income.
Based on the information you provided on the W-4, you should receive a form W-2, typically before January 31st each year. This lists the actual federal income tax, social security and Medicare taxes withheld from your pay. When filing your tax return (Form 1040), it is necessary to attach a copy of your W-2.
2. Form W-9 and Form 1099-MISC/ 1099-NEC: Freelance Artists aka ‘Independent Contractors’
Freelance musicians in the US should receive a form W-9 whenever billing amounts exceeding $600 for music-related services. They should later receive a form 1099-MISC or 1099-NEC from the respective payer before January 31st of the relevant tax year (e.g., 01/31/21 for payments made in 2020).
The purpose of form W-9 is to provide your SSN (Social Security Number) or TIN (Taxpayer Identification Number) to the person who hired you, so that they can provide a record of payments they made to you to the IRS.
Anyone paying over $600 for music-related services is required to send the payee (musician) a form 1099-MISC, or its equivalent, the new 1099-NEC (used by the IRS from 2020 forwards to track ‘Non-Employee Compensation’ payments). Any amount withheld by a payer for tax purposes should be reported on form 1099.
Pro Tip: Songflowr Music Distribution lets you effortlessly keep track of your music-related partnerships and payments. Combine this with a service like ‘efilemyforms.com’ to help you stay on top of tax filing requirements. Avoid stiff penalties for Form 1099s filed late (up to $110 per form post 31st January) or unfiled forms (up to $550)!
3. Form 1040, Schedule 1, Schedule C and Schedule SE
Form 1040 is the main form for filing individual income tax returns in the USA. This form is common across employee musicians and freelance artists.
Employee musicians need to report their earnings (from form W-2) on line 1 of form 1040, while freelancers or independent contractors are required to report earnings on line 8 (from Schedule 1, line 9).
Freelance artists must typically file Schedules C and SE in addition to form 1040 and Schedule 1.
Musicians can use Schedule C to claim tax deductions against music-related expenses, including studio/office rentals, equipment and maintenance costs, travel and meal expenses, professional payments, as well as costs of music memberships, fees and licenses.
Schedule SE is the main form for reporting self-employment tax paid by independent contractors in a wide variety of fields, from music to plumbing to agricultural occupations.
4. Form 8829
Many of our clients use a part of their home as a studio and/or office for professional, music-related activities. As such, form 8829 is an important component of tax filing for such artists, wherein they can claim the correct amount of tax deduction against their home office expenses. Allowable deductions include rental and utilities costs, as well as repairs and other maintenance.
5. Form 1065, Schedule K-1, Schedule E and Schedule SE
Partnering and collaborations being common among musicians, a lot of artists find themselves dealing with a bunch of tax forms pertaining to partnerships and LLCs (Limited Liability Companies).
Form 1065 reports only partnership earnings but not tax payments, which are the responsibility of individual partners. Each partner must report individual earnings via Schedule K-1, business income and expenses via Schedule E and self-employment tax via Schedule SE.
“Bills Bills Bills” – Keeping Track of Expenses for Tax Deductions
As the previous section emphasized, self-employment tax paid by music professionals is calculated on ‘income minus expenses’. Obviously, it pays to keep track of both income and expenses related to music. In fact, it’s not uncommon for artists who’ve gotten smart about tracking money to save big bucks come tax time!
Keep in mind, though, that only a certified tax preparer or CPA can advise you on how to optimize your tax savings in ways that are customized for your unique tax situation. Further, a professional tax consultant who is familiar with the music industry is likely to know best what sorts of expenses can be legitimately written off as tax deductions.
That said, an artist is in a much better position to navigate tax deductions if s/he has already laid in the prep. in terms of records of actual mileage, meal expenses, cash payments, and so on. So, here are a few pointers on how a musician can easily and smartly monitor money and cut down on taxes:
Use Apps for Smart Monitoring
Artists are often doubtful whether they need to report cash payments, especially small ones, come tax time.
Cash payments are also taxable, so it pays to develop a system for tracking incoming and outgoing cash. Use apps like Google Pay and Venmo, which maintain a history of your music-related payments.
Per Diem Rates vs. Actual Expenses
A common question among musicians pertains to travel expenses: Should they use the standard, per diem rates set by the IRS, or save the actual receipts for expenses such as meals and gas?
The short answer is: It depends. (The tax deductions you can claim will depend on many factors, including the length of the trip, your car’s age, etc..)
The full answer: Hang on to those receipts, anyway. Work out the optimal strategy for claiming tax deductions after consulting a qualified tax professional. Check out this post on tax tips for musicians from a professional CPA.
IRS Rule: “Ordinary” and “Necessary”
When claiming expenses as tax deductions, keep in mind that the IRS applies the thumb rule that they be “ordinary” and “necessary” for your professional activities. So, while claiming up to 80% of your home internet and utilities costs as your home office expenses would be likely counted as reasonable, hosting a lavish dinner at an upscale restaurant might not.
In the words of the sci-fi writer, Raymond Fisher Jones, “Next to being shot at and missed, nothing is quite as satisfying as an income tax refund.”
Hopefully, this post helps you make yours as big as it can get, but there’s one other important secret to getting a bigger tax refund — get bigger checks for your music to begin with!