A Quick Note: All of the information below pertains to taxes in the United States. Every country works differently so do research on self employment taxes specific to your country. I am by no means a tax professional, but hope to help you better understand the process of paying self employment taxes.
My First Job
When I was 16 years old I started my first job: working at a pizza place. It paid minimum wage, but I was happy to be making any money at all. I started in the middle of a billing cycle so I didn’t get my first check until 3 weeks after I had started working. I had done several intense training days and a few 20 hour weeks, so I figured the check should be pretty decent. “I’m no mathemagician,” I thought to myself, “but minimum wage x 75 hours or so = prolly bout like a thousand dollars.” When I opened the envelope, I was shocked. Surely there was a misprint on the check.
The amount was drastically less than I was expecting. After looking closer, I could see how many hours I had worked (75 or so) and how much money I had earned (prolly bout like a thousand dollars (actually less)). But then there was another category subtracting money: taxes.
The pizza place was automatically deducting taxes out of every paycheck. This is standard for anyone with with a normal day job. At the end of the year, you punch a couple numbers into Turbo Tax and, if it’s at all like the commercials, the computer says, “You get a $1000 rebate” and it pretty much feels like winning the lottery.
But you don’t work at a pizza place. You’re a professional musician. Unfortunately for us, self employment taxes are a little more complicated. Let’s break this down so you know what to do. When April 15th rolls around it’s not going to feel like winning the lottery, but you’re also not going to be thinking, “Where am I going to get money to pay my taxes?”
First Things First
Taxes are a pain in the ass, but they’re also crucial to our society. I don’t like paying taxes either, but I do like driving on paved roads, having criminals held in jail and other nice things that taxes provide. It sucks, but it doesn’t. So pay your taxes, and don’t whine about it.
Also, if you’re just starting your career as a professional musician you may not make enough money to have to file taxes. Click here to find out if you need to file a tax return.
Think About Taxes All Year
When I worked at the pizza place, they did all the tax work for me. “Doing my taxes” at the end of the year just meant double checking their math and making up the difference. When I made the jump to being a professional musician, I had to do the math myself. If you take nothing else away from this article, take this with you:
You should be thinking about your taxes all year long.
The confused feeling I had when my paycheck was less than I expected was one thing. But if you aren’t thinking about taxes during the year, you’ll have a similar feeling, but multiplied by about 50. A feeling of, “I owe how much?”
Not only should you be thinking about taxes all year long, you’re required by law. Self Employed Tax Payers are required to make estimated quarterly payments, in addition to an annual tax return (the one due April 15). Don’t think of this as a bad thing though. By paying your taxes 4 times a year, that’s less work leading up to April 15. While you’re technically required to pay quarterly taxes, many self-employed musicians still pay yearly and it works out fine. I can’t however recommend this method (based on the law mentioned above).
Regardless, you should be thinking about this stuff all year long. Don’t put it off. The longer you put it off, the more you’re going to hate yourself at the beginning of April.
Different Tax Forms
As a self-employed professional musician, there’s two main types of tax forms you’ll encounter.
This is the most common tax form that you’ll deal with. As a musician, you are mostly hired as an Independent Contractor. At the end of the year, the person who hired you includes in their taxes how much they paid you. They send that information to the government, and you’ll receive a 1099 from them. You’ll get these from anyone who has paid you more than $600 in a year. The more people you work with, the more of these you’ll get in the mail. Last year, I had about 15 1099 forms.
A 1099 form only reports how much money you were paid. No taxes are deducted by the employer (like at my pizza place job) so you are responsible for doing the math and paying them yourself.
This is the more standard tax form (like what I received from the pizza place). Your taxes are automatically deducted out of every paycheck you receive. You’ll get a W2 form at the end of the year summarizing all the taxes taken out. Then you’ll double-check the math and make sure the taxes taken out are all correct. This form is common for jobs that are ongoing, like teaching at an academy or working part time at a church.
The Bad News
We’re just going to rip this off like a band-aid and get it over with. Here’s the current federal tax rates as of 2014:
Income Tax (Single Filing Status):
- 10% on taxable income from $0 to $9,075
- 15% on taxable income over $9,075 to $36,900, plus
- 25% on taxable income over $36,900 to $89,350, plus
(There are higher tax brackets as well, but I’m going to assume you don’t fall into those)
In addition to income tax, we have to pay self-employment tax.
- 13.3% (10.4% for Social Security and 2.9% for Medicare)
The numbers listed above are for Federal taxes only. You’ll also owe state taxes, but those are typically significantly less. Since those vary from state to state, do some research to find out what your specific rate will be.
What This Means For You
Depending on your tax bracket, at the end of the year, you’ll owe somewhere between 23.3% and 38.3% of your annual income. It stings, I know. This means one big thing for you:
You should be saving money throughout the year so that you aren’t blindsided when it’s time to pay your taxes.
The amount you should save varies based on your tax bracket, but it’s better to save now than to have to figure out where you’re going to get money when taxes are due. When you get $100 from a gig, don’t think of it as $100. Think of it as $80, or $70 or whatever you’ve figured out is your number based on your tax bracket. As soon as you deposit the money into your bank account, transfer a portion of it to a savings account specifically dedicated to your taxes.
The Great News
While you’re recovering from the blow of how much money you owe the government, let me cheer you up. When you file your taxes, you not only report your income, but also your business expenses. This includes anything that you’ve spent money on throughout the year (or quarter) that has directly contributed to you being a professional musician. This includes, but is not limited to:
Instruments can be deducted as a one time expense, or set as a “straight line depreciation” which means that the cost is evenly deducted over a period of several years. Keep your receipts.
This includes any musical gear that you buy that isn’t an instrument. Cables, straps, pedals, strings, picks, and anything else that you can get at Guitar Center is going to be deductible. Keep your receipts.
If you bought a computer or an iPad this last year, and you use it for your business, that’s deductible. Keep your receipts.
If you recorded an album, any musician fees, studio fees, duplication costs, or marketing costs are all tax deductible. Keep your receipts.
Office Related Expenses
Remember how you made an awesome website for yourself? You get to write off the cost of your web hosting. Keep your receipts.
The awesome business cards that you made are also deductible. Keep your receipts.
If you bought any books on music business or business in general, you get to write them off. Scroll through your past Amazon orders (receipts) and total them up!
This includes any physical office supplies such as paper, a printer, pens, or any other items you use to do your work. Receipts necessary.
If you hire an accountant to help with your taxes (more on that in a moment), you can write that off. This also includes fees associated with other professional services like a Lawyer. Just make sure you keep your receipts.
If you spend part of your time working from home as a professional musician, you can write off a certain percentage of your rent and utilities. Just estimate what percent of your home is dedicated to your business. You probably don’t get receipts for your rent, but keep good track of this.
If you use your phone for business, you also get to write off a certain percentage of your bill. Estimate the percentage of business vs. personal use and deduct it! Receipts still necessary.
As a musician, you drive all over the place. Keep record of how many miles you drive and add them all up at the end of the year. You’ll get to write off 56 cents per mile driven. This also includes parking costs. Keep your parking receipts.
Car Payments and Repairs
You can deduct a percentage of your additional car costs (payments and repairs) since you use your car for your business. Calculate what percentage you think you drive it for business verses personal use. Guess what? Receipts.
If you’ve taken lessons with someone this past year, that falls under “continuing education” which is completely deductible. Receipt if you can.
Student Loan Payments For College
If you’re making monthly student loan payments, you can write those off on your taxes. Login to your loan site (such as Sallie Mae) and they’ll give your more specific information on how much you should be writing off. It’s basically like a big receipt.
While we’re talking about continuing education, this also includes iTunes music purchases and concert tickets. File your iTunes receipts as soon as you get them.
If you bought clothes specifically for your job as a musician, write ’em off. This also includes dry cleaning costs. Did you keep your receipts?
You can write off food expenses as long as it was a “business meeting.” This includes dinner at a gig, or lunch with your band as you discuss where you want to record your next album. You know what you need though? Your receipts.
As you can see, there’s lot of things that you can write off on your taxes. And so many receipts. The deductions don’t translate to dollar for dollar (each category is a little different) but including all of these help lower your amount owed considerably. For all of these expenses, you’ll need to save receipts to prove that you actually did spend money on this stuff. Don’t use an old shoebox. It’s 2014, use a receipt app instead.
Taxes Are Complicated
Now that you have a better understanding of how your taxes work, what to expect, and what to deduct, you are much better equipped for the upcoming tax season. Even though you have a good grasp on this stuff, taxes are still unbelievably confusing. I know how it works and the deductions that are allowed, but I’m not going to pretend to know how to calculate the exact numbers and file it. That’s so incredibly complicated that there are people who make a living from figuring it out. Speaking of which:
Get a Good CPA
After you’ve compiled all of your income and deduction totals, take that information to a Certified Public Accountant. Google “CPA” and your city and call up several different accountants. Ask them if they have experience filing taxes for self-employed people, or even musicians. You’ll get a good idea of their experience and whether or not they’ll be a good fit for you from these phone calls.
I know you’re probably thinking, “After all this, I still have to pay an accountant to do my taxes?”
Unfortunately, yes, but let me say this. Paying a CPA to handle your taxes is the best $100-$150 you’ll spend all year. Plus, you’ll be able to deduct the cost from next year’s taxes. Keep your receipt!
Bonus: Free Tax Deductions Spreadsheet
To make tax season easier for you, download the free Tax Deductions Spreadsheet below. You can download it as a Excel or Numbers file, fill in the blanks (for all the categories mentioned above), and the spreadsheet will do all the math for you. Then you can send it off to your CPA and they’ll take care of the rest.
Fill this form out and I’ll send you the spreadsheet right away. I’ll also let you know of future posts here on the blog, guests on the podcasts, or other helpful stuff. Unsubscribe at any time.