November 3, 2015 by emunro24
Just hearing the word “taxes” is enough to draw up memories of finding crumpled receipts in old shoeboxes, exhausting talks with your accountant, and pulling the hair out of your head. But taxes don’t have to be a dirty word for musicians; understanding your taxes can actually save musicians a lot of money. These few steps can help you get your money’s worth on your next tax return.
- Should you file as an LLC?
A Limited Liability Company (LLC) allows owners to get taxed like individuals or companies, but without any personal liability. For example, if your guitar amp explodes on stage and wipes out your entire fan base (talk about a rough night), their families can go after the money that belongs to your band (the registered LLC), but can’t go after any of your personal assets. Now this sounds pretty great, especially if your band is making money and can start getting taxed as a company. But the filing fees to become an LLC can be hefty (ranging between $100-$800 depending on your state). Lawyers aren’t cheap either unless you’re lucky enough to know someone willing to give you a hand. If your band is having trouble closing out bar tabs and getting gas money to make it to your next gig, it’s probably time to hold off on this step. But if your band is starting to build up some funds and really get your name out there, becoming an LLC is an important step. Many record labels will request your band become an LLC before entering a contract with you, anyway. (Nolo.com has some great information on how to start the LLC process.)
- Making the most of your deductions.
Deductions are expenses that the government allows you to subtract from your income before taxes are calculated. For musicians, deductible expenses range from merchandise purchases, mixing/mastering fees, business registration fees (so the $800 price tag for that LLC won’t hurt so bad), and even public transportation to gigs. It is important to know how to make deductions properly in order to avoid trouble with the IRS. For instance, you can only deduct 50% of recording costs in the year of recording, the other 50% can be deducted evenly over the next two years. (Alexis M. Kimbrough of the Growth Group has a great list of 100 deductions for musicians.)
- Get the most from your home studio.
Great new legislation allows musicians to claim their home studio as a deduction. As long as the studio is its own separate entity in the house and is used solely for business, musicians and engineers can use form 8829 to calculate the amount of home expenses accountable to that room. (Get more info directly from the IRS.)
- Make sure you’re filling out the right forms.
If you’re making more than $600 from any venue/business, you have to fill out a 1099 form each year (if you filled out a W9 form, the business should send you one of these). The IRS actually has some really quick resources to figure out what forms you should fill out based on if you’re filing as a sole proprietor, partnership, or LLC.
Most importantly, if you have any questions or concerns, don’t put off seeing an accountant. You might end up saving more than it costs to pay them! And if you want to make your life (and your accountant’s) easier, keep good records of all income and expenses. You never know what receipt you’ll be pulling out your hair trying to find when April comes around!