This episode about musician tax write-offs and strategies was previously published on the Profitable Musician Show.
We’re going to talk about finances, which is a topic not many musicians talk about. Barbara Johnson is an accountant, and she does mostly bookkeeping and taxes for all kinds of businesses. She’ll talk to us about musician tax write-offs and strategies, as well as specific challenges musicians encounter when dealing with their finances.
Barbara was actually a musician as well. She started playing the piano when she was three years old, and she also knows how to play the trumpet. Her father wanted her to study music education, so she didn’t. She hasn’t played her instruments since then. She was good with math and her father also wanted her to be an accountant. She immediately joined the navy. After being in the military for a decade, she worked for a game store where she was asked to manage the store and do bookkeeping and inventory. She fell in love with it and has been doing it since then. It’s her passion.
She has worked with a lot of business owners, mostly sole proprietors. Most musicians will be sole proprietors.
Mistakes made by musician sole proprietors:
1. They are not doing bookkeeping regularly.
2. They don’t know things that can be deductible.
3. If you have a home office, some percentage of your mortgage and electricity can be deducted from your taxes.
“If I have a business, do I have to do a Schedule C?”
One important thing about musician tax write-offs and strategies is a Schedule C. A Schedule C is for anybody that is a sole proprietor. If you have a business and you’re making money, whether you’re using it all up in expenses or not, you should file a Schedule C, which is you take all of your income and you get to deduct all of your expenses. Either you pay tax on whatever income you made, or if it’s a negative, it can offset any other income that you had. A lot of times, musicians that I’ve known have a second job. They have music, and that is their passion. That’s what they do gigs with and they make money. They have a second job. Your Schedule C then can counterbalance against that. Either it will add extra income to it if you’ve made more money or it can subtract away from that income if you’ve had more expenses than income in the business. You have to be careful when doing that because the IRS does watch that closely to make sure it’s a business and not a hobby, but it can end up to your benefit to do both have a job and a business that you’re working at.
Where is that line as far as the way that IRS looks at it, whether it’s a business or a hobby?
The line is you have to start making positive income for 3 or 5 years. For most businesses in the first year, almost none of them make an actual income. Some of the strictly completely only service-based incomes and businesses, as in they have no outlay. They are an office that they do jobs on their computer. Even they won’t have a positive income their first year sometimes because they’ve got to buy a new computer or the software needs to be updated. They have to have certain files and different coaching programs.
After that, in the 2nd, 3rd, 4th or 5th year, the IRS checks on those. Those who want to start being making towards, you’re getting that income coming in onto the positive side because if you’re not making money, the IRS can’t tax it. That’s never a good situation to look at. That’s the whole point. They want to make sure you’re doing it as a business because if you’re doing it as a hobby or to lose money so that you don’t have to pay as much tax on your other job, they frown on that. You’re in business to make money. If you’re not making money, they want to see where you’re making corrections in order to be making money.
Why you don’t usually make income during the first year
Some musicians may not understand why they would not make income in the first year. When you’re doing jobs on your IRS form, you look at things that you normally spend on and that you probably do anyway, such as subscriptions, equipment, instruments or lessons and that is deductible since you use it for your business. Even if you buy a computer, or a microphone, or a cellphone, as long as you use it in your business regularly to make money, that is a huge deduction for musicians.
How to separate your finances
The IRS requires a separate business account so there’s a money trail. Have a separate trail for checking, savings and credit card. Make sure that card starts out at zero and then only use it for business. Also, choose a card that gives you perks back for your spending. It doesn’t have to be in the business name but it needs to only be used for the business.
How musicians can make sure they know what is going on in their finances
Musician tax write-offs and strategies are important. You need to have a bookkeeper or do the bookkeeping yourself. Every week, put those receipts in, put the income in and monthly, run a report. Barbara recommends Quickbooks.
Sole Proprietor vs S Corp
Contrary to what some people say on the internet, being an LLC does not help you with taxes. It’s still the same as being a sole proprietor.
It’s different for everybody. Once you get into the $75,000 or $100,000 range, you look at it closer because when you come in S corporation, you have to separate everything completely. You’re filing two tax returns and then you have to look at. You have to then pay yourself a salary, so you have to go on payroll because you’re no longer an owner. You’re a member, a shareholder, and an employee of the S corporation. You have to pay yourself a reasonable salary. It doesn’t mean you can’t take any more money out, but then that counts as capital gains.
There’s a tax line there. You have to look at, “I’m paying now myself as an employee, and I’m taking this money out.” You’re going to pay taxes on both of those, but it’s different between them because you’re not paying that self-employment tax anymore. You’re paying it as the S corporation, and then you have the fee for doing two tax returns. You have to have one done by March 15th and the other by April 15th.
According to the IRS, you need to file that election by March 15th if you want to be an S corporation for the year. You can also file a retroactive but that takes a lot of time. Filing it on time will be much quicker.
If you spend one hour a week getting it done, that saves you three days at the end of the year, having to try and get it all together.
She can help you set it up for $500. She can also do your monthly bookkeeping for $350 minimum.
Get in touch with her on her website at www.KISBAA.com, email her at Barbara.Johnson@KISBAA.com, or text her at (321) 320-2560.