Paying Taxes

[Dom Franco]

Many moons ago, I was in the musician's union. I had withholding taken out of my pay checks, Filed taxes every April. I even collected unemployment benefits from some gigs when I was later out of work... etc.

Now I work a real job and make most of my money there, but lately when I gig, some places are having me fill out a W9.

MY QUESTION IS:
Since I spend far more on instruments and equipment than I earn, how can I deduct all that from my earnings as a musician? Do I have to incorporate? Claim self Employment?

Thanks for any help in advance.
Dom

[Roual Ranes]

AT ONE TIME I HAD A REGULAR JOB, RAN AN UPHOLSTERY SHOP IN MY GARAGE AND PICKED WHEN I FOUND A JOB. THESE WERE TREATED AS SEPERATE INCOMES AND I EVEN WROTE OFF GUITAR PICKS......YOU CAN ONLY LOSE MONEY FOR SO LONG OF A TIME THOUGH..........I THINK IT WAS THREE YEARS.

[Tony Farr]

Keep a GOOD RECORD of everything you spend and everything you make. My wife keep ledgers of eveypenny I made and pent. Then we let H&R B figure out everything. I always had to file but didn't have any income to speek of, to where I had to pay anything. Evey time we'd stop and get a cup of coffee, she'd have me get a receipt for it.

[Mark van Allen]

Hey, Dom, I've prepared a talk course on tax preparation for musicians, based on having done my own taxes for many years, and watching musician buddies miss taking advantage of all the deductions and perks we can use as self-employed people. And unfortunately, most tax preparers are well versed in general tax law, but miss a LOT of the deductions we can use.
Among other things, it's much easier, faster, and usually gives a larger deduction to take the standard meal allowance and skip saving every little receipt. You just don't have to do that- but you have to know how to do it.
Here's the course link: http://bb.steelguitarforum.com/viewtopi ... highlight=
Or here on my website: http://www.markvanallen.com/store_books.html
I'm on my Honeymoon this week, but if you want a copy, I'll get one right out to you when I get back.

[Bill Terry]

What Tony says.. and I see Mark posted while I was typing. That sounds like good advice.

I file a Schedule C on my 1040 return each year, and if you keep good records as suggested above, I think you'll find it surprisingly easy to show very little (or zero) profit for the year. The downside is that you actually see the bottom line and what it costs you to play gigs. Sobering..

Here in Texas I drive a lot of miles to do gigs, and good mileage records provide my largest deduction.

[Roger Rettig]

I've played for my living for fifty years now, and the last eleven years have been here in the US. It's a habit with me to keep all receipts and good records of everything, but I've always filed my taxes using an accountant.

Lately I'm beginning to question the wisdom of that, especially in light of Mark's post - what if the accountant is missing stuff!!? It's quite pricey, too, and I've always justified the expense by asuming that what I'm paying for is his 'good name' and standing with the IRS. That's probably nonsense, though, so I'm going to give it some thought before I file for 2010.

What, for example, is the 'standard meal allowance'? I didn't know there was one! That'd make life easier should I choose to do my own filing.

I've always thought that working out the various 'pro musician/entertainment industry' allowances was best left to an expert, but now I wonder!

[Steve Reynolds]

Roual is right.I was told, If you lose money for 3 years the I.R.S considers music a hobby & you can't claim it. Steve

[Mark van Allen]

Hey, Roger, the standard meal allowance is found in a publication you have to do some looking for, (Per Diem rates under the M&IE rates at usa.gov).
I think the low rate this year is $39... but if you have records of where you've traveled you can take a few minutes and go through the publication and find higher rates, for example Barstow, CA is $59, L.A. is $64. Most of us don't really eat that much in a day, so it ends up being much easier to claim the allowance, which requires no record keeping, than to save all those receipts for less deduction. Either way, though, you can only take 50% of your meal expenses on a schedule C. Legitimate expenses for entertaining, say, pizza and beer for a rehearsal, or dinner and drinks for a meeting with a booking agent, come off as well, you would need receipts for those.
Lots of people suggest just saving all your receipts in a shoebox, and hand 'em to your accountant. But these are things the accountant often won't bother with, since he'd have to ask where you were staying each night on the road.
Above all, most musicians need to keep a simple mileage record, date, where you're going, business purpose, amount of miles. My deduction last year was $8400 for mileage alone.
Many, many more tips in my course, which runs through filing in the order you have to go through the forms and publications.

[Mark van Allen]

If you keep records, perhaps have equipment insurance, and file correctly, the IRS appreciates an effort to "start a business". Yes, if you continually lose money, it won't be considered a business, makes sense really. But if you're careful, and leave off a few deductions you might take, you can always make enough to show a small profit, and perhaps only owe a small amount of self-employment tax.
Doing the filing yourself makes all this a good deal more clear as you go along.

[Ben Jones]

LA rate is $71 /day. (you guys live large!)
Here are the current rates:
http://www.gsa.gov/Portal/gsa/ep/conten ... 7943&noc=T

lodging rates are in there too, keep in mind thats base rate before fees and tax. no minibar or movies

The current mileage rate is .50 even. This includes compensation for wear and tear on your vehicle AND GAS. You cannot claim mileage AND gas and you should always claim mileage (its a pretty generous rate). The mileage rate changes frequently (a few times a year) based on gas prices. instead of keeping track of your mileage..just print out a mapquest showing the mileage for your trips.

cell phone, blackberry, internet, parking, bridge tolls, toll roads...all deductible.

[Roger Rettig]

Mark

I've been to your website but couldn't see how to place an order. I'll email you....

I was surprised to see how high the various meal allowances are! Well-worth going into. I do think my accountant keeps a canny eye on my profit/loss situation and keeps things realistic. My situation is complicated by the fact that half my contracts are on a 10-99 and others on a W-2.

I heartily approve of the mileage allowance principal - back in the UK I used to have to keep track of all repairs and servicing, yet the allowance here covers all that with a simple formula. Good to know that there's a similar arrangement in place for food expenses.

[Ben Jones]

yeah the per diem allowances are generous in my opinion. international travel is where the big per diem bucks are.

You are supposed to base your per diem rate on where you lodge for the evening. so you spend the whole day in LA and eat all three meals there but then drive to the death valley and get a hotel for the night...your getting the death valley rate, not the LA rate.

[Stephen Silver]

Now I am no Accountant (though I did play one in a commercial)

Sometimes the mileage rate is NOT the best way to deduct your traveling expenses. If you drive a lot of miles it is often the best. If you drive few miles and say have an expensive car/truck (yea yea I know, we're all musicians) you can depreciate the vehicle per schedule in addition to exact fuel, repair, maintenance, waxes.

Use of electronics including cell phone and computer is based on the % of use for business. Are all the hours we spend on the Forum therefore deductable? smiles

Also, I have been looking into forming a Limited Liability Corporation (LLC) to protect my personal assets and allow my business to run at either a profit or loss irrespective of the three year rule. Anyone have any experience with this or comments?

SS

[Ben Jones]

yes, cell phones, internet etc...deductible for business use, not personal use..I thought that kinda went without sayin.

sometimes at hotels you pay for wifi...you need to check your schedule, your email, get mapquest to the next town etc etc...business purposes.

I should ad that i dont personally do any of this as I dont make any over the table money playing music (or under the table money for that matter). I do reconcile travel expenses for a "living" tho.

[Rick Myrland]

Stephen:

Creating an LLC probably wouldn't do much for you. The difference between this and a simple Sch. C attached to your 1040 is the "limited liability" aspect which, for a musician, has minimal value unless you anticipate having legal issues. If you create an LLC and are the only member, as I assume you will be, the company is treated as a pass-through and the income (or loss) gets reported on your 1040 via a Sch. C anyway, so you're right back where you started. In the mean time you will have spent time and money filing for LLC status with your State. And most States require you to file an annual report or relegate you to "delinquent" status, which may not have a material impact on your LLC or tax filing status but will make you look less credible if someone actually takes the time to check you out before hiring you.

I'm a Special Agent in the Criminal Investigation Division of the IRS and I can tell you to be careful of some of the free advice given on the forum; it's worth exaclty what you paid for it. Some is accuarate but not all of it and whatever you do DON'T assume because you use a major tax preparation company that they know what they are doing. Often times these firms give employees minimal training and allow them to prepare returns even if they don't pass all of the in-house exams. You are best to get advice from an actual CPA, but he/she doesn't necessarily have to prepare your returns every year. Once they set you up and get everything in order you should be able to do everything via one of the major tax preparation softwares out there (that's what I use and because I work at the IRS I get audited every year, never had a problem yet). You can use a CPA every year but it gets costly. Whatever you do "interview" the CPA first to make sure they understand your situation and are familiar with what you are trying to accomplish. Not all CPA's are created equal.


Roger:

I'm curious as to why some of your contracts pay on a W-2 and others on a 1099-MISC (I assume it's a 1099-MISC). If there's a contract involved it seems to me you should only be compensated with a 1099 since you are not an "employee" by legal definition and therefore a W-2 would seem inappropriate. If you get a W-2 then I assume you filled out a W-4? If you didn't complete a W-4 then how much do they know to withhold and, more importantly, what are they doing with it? Are they sending in the withholdings to the IRS and Social Security? If not then whomever is paying you with a W-2 is pocketing that money -- happens all the time. I'm not saying this is absolutely happening because I don't know all the specifics, nor do I need to, but if you're confused by this I would get it clarified. Then again I get paid to be skeptical so maybe this is all legit.

I don't want to dwell on the matter because it could be legit but from your post it seems you are uncertain why this is happening, so a final bit of food for thought on this matter. If in fact your withholdings are not paid over to the government two things are happening: (1) whomever is issuing the W-2 is technically causing you to file a false tax return because your claiming withheld income taxes on your return that in fact were never paid to your tax account and (2) you will someday get screwed by social security because you will not have been credited with all of your actual earnings. That's one reason why Social Security now sends out those notices every year or two, to make sure all of your income has been properly reported to them. It's sound advice for everyone to read that over carefully and contact them if it doesn't seem correct. We work over 200 criminal cases a year nationwide on employers (and send a large number of them to federal prison) who withhold tax/social security money and buy some really nice cars and homes with it. Haven't found one yet though that's buying steel guitars.

[Roger Rettig]

Rick:

Thanks for your comprehensive reply to some of the questions raised in this thread.

When I receive a contract for an upcoming engagement the paperwork will usually contain the appropriate tax forms. If it's to be a W-2 job then they'll send me the W-4 which I'll complete and return. On reflection it seems to me that it's becoming more common for my jobs to be 10-99 MISC; not sure why, but either is okay by me. The W-2 ones, though, are welcome because it means that I'm discharging some of my tax obligation in a relatively painless way ahead of time. It occurs to me that it's less-expensive for an employer to engage me on a 10-99, yet I still sometimes get that W-4 in the mail.

I'm satisfied that the handful of employers that do make deductions are doing the 'right thing', because my Social Security forecasts seem to tie up. It also becomes apparent should I file for unemployment benefits - they'll have any of my credits in their files and I've yet to encounter any disparities.

I'm already receiving my (meagre!) Social Security payment, and I qualified for Medicare coverage in the first ten years of working in the USA (1998-2008); I think I've probably benefitted from professional treatment by my tax-preparers in that time.

I've seen too many musicians come unstuck (especially back in the UK) because they thought they could slip under the radar. It was mostly the semi-pros, though, who assumed that, because they had a 'regular job', they were immune from taxation on their weekend pursuits! I believe that the allowances (either side of the Atlantic - travel, instruments and their maintenance, stationary, study material, etc, etc) are generous enough that trying to hide even a $50 'casual' is foolish and unnecessary.

[Bill Terry]

But if you're careful, and leave off a few deductions you might take, you can always make enough to show a small profit, and perhaps only owe a small amount of self-employment tax.

As it turns out, I end up making some money most years, but not enough to have serious self-employment tax implications. I've always been real up front on my returns concerning my musical related income, since I witnessed first-hand the agony a guy in my situation (day gig is primary income, but substantial income from music) went through when he decided the musician stuff wouldn't be 'a big deal' (under the radar as Roger says) for the IRS. He was wrong...

[Dom Franco]

This is a very informative thread. Thanks for all the responses.
I still am wondering what's the difference between a 1099 or W9 form? and will I get a summary of income at the end of the year?

thanks
Dom

[Jeff Hyman]

1099: A receipt the Club uses to show the IRS they paid a band $xxx.xx for that year.
The Club issues the 1099 to the band leader, who is usually the person endorsing the checks.

1099: A receipt the band leader uses, showing the IRS what he distributed to his band members, their share of the income... thus reducing the tax exposure by the leader.

W9: A blanket form, giving the Club all your personal and confidential information. Many Companies require a W9 to make payments.

There is a $599.99 gross income requirement (limit) per Club before a 1099 is issued from the club to the band. A W9 is another story. The only way I'd give anyone a W9 is if the payment was coming directly to me, directly from the Club, and it was known I'd get more then $600.00 per year of gigs. If the Band Leader receives the funds, then redistributes to the players, then only the Leader should give the club a W9. I do give a W9 to the Band Leaders CPA only.

In all fairness, the band leader should not get stuck with paying everyone's taxes. FYI: The IRS could care less if you fail to issue a W9 or 1099 to your fellow band members. Whoever receives the funds is liable to pay the taxes. Any dealings under $600.00 goes under the radar.

PS: I am no accountant. I declare all my musical income, and all the expenses that go along with it. Good Accountants can be very creative in this arena.

[Ray Minich]

My graduate school Fed Tax course was 12 years ago but at the time the particulars about showing a profit were "Two Years out of Five". Probably still works that way.

Grab a copy of TurboTax Home and Business for $100 and go thru it. It does Schedule C and has ALL of the forms. Once in a while you have to out-think it (like if you want to file an extension and don't want to wade thru it 'till you get to that page) but it's good for learning the process.

[Herb Steiner]

Regarding the W-9 situation:

About 25 years ago, the commonwealth band I was in had regular gigs at two clubs in Austin, both owned by the same corporation, about 125 dates a year. We had other gigs as well. Our fiddle player took the money at the end of each evening and distributed it to the band in the dressing room, a very common scenario.

He filed an honest tax return based on his yearly music income of +/- $15K, but got kicked out by the IRS computer. "Mr. Swanson, you claim income of 15 thousand, but our records show Silver Dollar, Inc. paid you over $60,000 alone." Yes, he was audited , and each of us in the band had to submit letters to the IRS verifying that, in fact, Mr. Swanson DID distribute the monies to us individually at the end of each engagement. I'm sure this information was compared against all of our individual 1040 returns. Fortunately, no one else in the band was audited, but Rusty's returns got reviewed for the following 3 years.

My advice: BE HONEST WITH THE IRS! I declare ALL monies I make as a musician; checks, PayPal, AND cash... even if part of the cash is quarters taken out of the pool table and later spent on a coffee and donut for the drive home. Take advantage of ALL legitimate deductions, some of which are actually pretty generous, like the mileage and per diem amounts.

I have an excellent CPA, who knows how each expense I claim on my Sch. C is related to my business activities and can discuss the information specifically with the IRS if needed. My income, it should be noted, isn't only cash from playing gigs, but also income from writing, producing, and selling instructional material, so my Schedule C, and therefore my legitimate deductions, might be more extensive than that of just a weekend honky-tonk player's.

To me, it's MUCH easier to just claim all the money and take all the deductions than it is to lie, commit a crime, and then worry each year you might be found out. And if you owe money, cowboy-up and pay the damn tax.

To me, my sleep is more important than whatever few bucks I'd be dubiously "saving."

[Mark van Allen]

Herb, your advice is, as usual, spot on.
Many of the musicians I know have viewed much of their income as "under the table" with varying consequences, including being unable to finance cars and houses.

Some years back a dear friend was leading a small combo that played regularly at a local club, and all of them dealt "under the table". The club was audited for a different problem, which lead to them scrambling to find as many deductions as possible. My friend was the only leader they had contact info on, so they saddled him with nearly the whole year's worth of band payments. He had no records, and none of his band had filed on their music income, so he was left holding the bag. He ended up selling his house to pay the lien.
The I.R.S. isn't truly evil, but they can certainly be zealous.

[Roger Rettig]

Good advice, Herb, and I, too, declare every penny I'm paid. There are more-than-adequate allowances for people in our position, so an honest approach to one's bookkeeping is the best option.

[Dave Hopping]

There's also an important psychological advantage......If you pay real taxes,it's a real job.I have many times taken pleasure in nailing people,especially musicians,who because of sloppy thinking use the expression "real job" to describe non-musical work.