Musicians and taxes don’t seem to mix very well. Taxes and administrating the business of music are often last on the list of concerns for the working musician. The artist temperament simply does not interface well with the exacting, rule-filled world of federal and state taxation. Musicians avoid the whole matter and consequently leave themselves vulnerable to bad advice. The secret to overcoming this phobia is to develop an understanding of the mechanisms of the tax code and some simple, effective ways of complying with this onerous task. I often use the analogy that you may not need to know how to fix your car but it is helpful to know how it basically works. In so doing you will pay less in taxes and you will be less likely to fall prey to erroneous tax information and disreputable advisors.
Most working musicians are considered “self-employed” in regard to filing their taxes. In a legal and taxpaying sense this means that your “business” as a musician and you as an individual taxpayer are one and the same. The musician/performer usually files a “Schedule C” as part of their regular 1040 income tax form (this is where you report all those nasty 1099s you received last year!). The performer may also file form 8829 for the home office deduction and will be required to pay self-employment tax (Schedule SE) on their net income (profit) as well as federal income tax. All these forms are part of the year-end 1040 income tax filing. The self-employed musician will also usually be required to pay estimated quarterly taxes on Form 1040-ES (if the tax liability is to exceed $1,000).
The goal is first and foremost to lower your taxes! The musician/performer has a number of tax deductions that are unique. In the balance of this article we will try to break them down to their component parts to make the issues understandable. For the IRS, all deductible business expenses are those that are:
- Incurred in connection with your trade, business, or profession
- Must be “ordinary” and “necessary”
- Must “NOT be lavish or extravagant under the circumstances”
It does not take much analysis to see that these guidelines are not an exacting science. Bruce Springsteen’s recent stay at the Four Seasons Hotel in Boston would for many other working musicians be considered “lavish and extravagant” by the IRS. Mr. Springsteen can no doubt justify the expense due to his need for security and privacy that most musicians would not need. Is a vintage 1955 Fender Stratocaster purchased for $75,000 “lavish and extravagant” when you can easily buy a new one for less than $1,000? Good question; it may even be considered an “antique” and as such the depreciation write-off may not even be allowed. (By the way, in two recent appeals, courts determined that antique instruments are allowed depreciation as long as they are being played – see the section on equipment.) As you can see, there is plenty of space for interpretation between the cracks here. These are the types of questions that can arise on audits – so be prepared.
The performer has a bag of basic expenses that easily fit the above criteria: travel (hotel, meals, etc.), vehicle and transportation, equipment, supplies, stage clothes, home office expenses, legal and professional fees, recording costs, etc. (we’ve attached a list for your convenience). Let’s review some of the more complex and contentious deduction areas, but first let’s discuss income.
Income for the Musician
Income for the musician is: all payments for gigs, income from teaching, sideman work, session work, etc., regardless of whether you receive a 1099 at year-end. It is a common misconception that if you do not get a 1099 then it is not reportable income. This is untrue. If you have income in any form, it is required to be reported on your 1040. The form 1099-MISC tax form is supposed to be filed on any payments made to an individual for services amounting to more than $600 in any calendar year. In the case of bands, club owners typically don’t want to issue multiple 1099s to each member and will want to pay the bandleader and issue the 1099 to him or her. In this case the bandleader will report the entire 1099 income on his/her schedule C form. The bandleader will then issue 1099s to individual band members to account for amounts paid to them and then take the expense deduction. If you will be required to issue 1099s at year-end ($600+ payments in a year) for fellow musicians, roadies, lighting or sound people, etc., be sure to get their tax ID information when paying them. You can do this by having them fill out IRS form W-9.
Travel and Meals
The professional musician is allowed to deduct all expenses associated with overnight travel. These include meals (only 50% deductible), hotel and lodging, reasonable tips, dry-cleaning, phone calls home, etc. Overnight travel is roughly defined by the IRS as travel that is far enough away from home so as to make it inconvenient to return home at night. Travel could include expenses related to performances, recording sessions, auditions, etc. and will include many of the expenditures made on such trips. One question often asked is whether or not the travel deduction applies for mixed vacation/business travel. If the trip is primarily business then deductibility will be maintained. For example: a trip to New York City for a weeklong gig that includes a two-day stopover in Philadelphia on the way home to visit a friend. In this case the entire NYC trip would be deductible but the expenses related to the Philadelphia stopover would not be. Since maintaining receipts on the road is difficult, consider using the IRS “meal allowance” for deducting meals when traveling. This “meal allowance” (adjusted annually by the IRS) ranges from $39 to $64 per day depending on the location. In practice this means that receipts for meals are not required as long as the travel itself can be substantiated. This “allowance” includes all three meals and incidental expenses for the day. Travel for spouses or dependents are not allowed unless they are employees or part of the band.
Meals are deductible (remember, only 50%) as part of the overnight travel. They are also allowed as a separate (non-travel) deduction when they meet the criteria of “ordinary, necessary and business related.” This means that the meal must include direct business discussions. This can mean lunch or dinner meetings with agents, fellow musicians, club owners, promoters, record producers, etc. If a direct business purpose were documented then the deduction would be allowed. These meals could include discussions on band schedules, music arrangements, possible future gigs, recording dates, meetings with lawyers or accountants, and record companies. The best place to keep records for these expenses is in an appointment book. Log into your book who was present, and briefly the nature and substance of the discussion. I suggest that you keep a copy of the person’s business card as further substantiation.