You may think we just finished tax season, but it will be here again before we know it!
Did you barely survive? Did you lose so much of your income to taxes you are wondering how you will survive the rest of the year?
Now that a lot of the pandemic relief has dried up, you may be feeling then financial pinch more than ever as a musician. It’s critical to know how to keep as much of those hard earned dollars as possible.
Have you experienced any of the following frustrations while trying to maximize your earnings as a musician?
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Getting eaten alive by self-employment tax (The self-employment tax rate is 15.3% and consists of two parts: 12.4% for social security and 2.9% for Medicare.
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Wondering if you owe taxes in each of the states in which you’ve worked over the past year, but not knowing for sure until you’ve paid the fee to gain access to file in that state (if you are doing your own taxes).
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Spending forever trying to do your own taxes only to find out that you’ve done something wrong, or forgotten deductions you could have listed.
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Wondering how you are supposed to pay all of your bills and even think about saving for retirement or paying for health insurance at the same time.
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Wishing you could write more off on your taxes.
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Getting audited for things that you think should count as deductions.
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Losing a HUGE chunk of your fee when you work out of the country.
- Thinking that you’d prefer to have someone do your taxes but you don’t think you can afford it.
If you have thought about any of the above questions, you are not alone. Musicians often struggle with the business side of what we do. Taxes are often an afterthought, and as a freelance musician, we frequently don’t know how much income to expect each year. It’s hard for us to get approved for home loans, difficult to know how much to set aside for taxes, and forget trying to set money aside for unexpected expenses.
So, what do we do? Here are some recommendations for musicians to make the most of your income.
- Hire a CPA or accountant to help you with your taxes.
- Consider forming an LLC or S-Corp for your freelance income
- Use an app to keep track of expenses for deductions, and to help you have a clear record of your spending.
Admittedly, each musicians financial picture is unique, but in general, if you are working in multiple places either within your country or internationally, the above suggestions will be necessary to keep you afloat financially and to ensure that you are managing your money responsibly.
Hire a CPA
Do you need a CPA or an accountant? What’s the difference? An accountant is generally someone with a bachelor’s degree in accounting, a CPA is someone who is a Certified Professional Accountant, which means they have earned a unique certification. In short, they have more in-depth knowledge and training and can potentially find more deductions and ways for you to make the most of your income.
What does tax preparation cost?
Again, because individual circumstances vary, it’s almost impossible to give a specific number for how much tax preparation will cost you, but at the lower side of the spectrum, a single individual with no itemized deductions will pay about $220 for tax preparation. If you have itemized deductions, and income from various sources requiring different tax forms, that will go up significantly. Higher estimates for more complicated tax preparation go up in to the $1500 range. Bottom line, you’ll have to ask your CPA for an estimate.
Is it worth the cost?
In my case, I file “married, filing jointly,” but I have to file taxes for both my Vanderbilt income and then my self-employment freelance income. My wife also owns a business as well, which is pretty awesome, check it out here. So we have to file for our individual businesses and then our joint taxes as well. It is 100% worth it to us to not spend the time prepping our taxes and have the peace of mind that they are prepared accurately and efficiently. Do we pay a chunk of cash for that, yes? However, based on what our time is worth to us, there’s no question that this is a good investment for us.
How do I find a good CPA or Accountant?
Word of mouth, plain and simple. This has proven for me, to be the best way of finding the good financial professionals. Musicians with a good tax professional will be excited to tell you about it. In addition, CPA and personal accountant websites are notoriously terrible in my opinion, so it’s difficult to determine how legitimate or competent a tax professional is from a bad website.
Don’t be afraid to call and ask about certification and fees. Know everything up front, you don’t want any surprises. Also, call early, remember, tax season is CRAZY for these tax professionals, If you call one week before taxes are due, chances are you’ll be out of luck and they wont’ be able to fit you in to the schedule. You should have all your 1099’s by the end of January, so call in January or early February at the latest to get on the “list,” if you’re a new client. Tell them who referred you. That’s good for the tax professional and good for the friend who told you about them.
Forming an LLC or S-Corp
What in the world is this? In short, you form a business entity and run ALL of your work through that business. Many musicians have other jobs, some of them send you a W2 tax form at the end of the year. You can run the income and deductions that are not tied to the W2 form through your LLC or S-Corp . For many musicians, that means reporting a loss on your business since the cost of lessons, transportation, lodging, music, internet, phone, gig prep, instruments, concert attire etc. can be deducted from your income.
What’s the difference between an LLC and an S-Corp?
This can get complicated, but again, it depends on your individual tax needs. In short, LLC’s have more flexibility when it comes to shareholders. They can have unlimited owners and a board of directors isn’t required. S-Corps are globally recognized, can go public, and the shareholders must be U.S. citizens. In addition, with an S-Corp, you can designate some of your income as salary and some as a distribution, which isn’t taxed at the incredibly high self-employment rate.
Your next question might be, wait, it’s just me as the owner, or just me and my partner, can I still form an LLC or S-Corp? That’s totally fine, you can do an LLC or S-Corp with just 2 people. Again, ask your tax professional which would be best for you. The biggest advantage is being able to separate income streams and maximize deductions for those freelance gigs.
Again, there is MUCH more to this, but your tax professional will be able to guide you through the pros and cons, as well as the costs to determine if this is a good move for you.
In my case, it has helped tremendously, especially with international gigs. Our taxes have been manageable since we formed the S-Corp 10 plus years ago.
Budgeting Apps
Budgeting stinks. It can feel suffocating to realize that you don’t have enough money to get the things you need, let alone the things that you want. However, many of us musicians are simply terrible at tracking where our money is going and how much we are spending in individual categories. We also often don’t have the necessary documentation at the end of the year to help our tax professional find as many deductions as possible for us. Remember, there’s no guess work when it comes to the IRS and they love to audit musicians. Our tax returns often look suspicious for a variety of reasons, so documentation and record keeping is key.
Here are some of my favorite budgeting apps:
This is a free app, available in Google Play and on the App Store. Mint will sync with your bank accounts, credit cards, and investment accounts and tracks your expenses and allows you to put them in to categories. Some of the categorization is limited, and sometimes individual customization isn’t possible for certain expenses. The account syncing is sometimes glitchy as well. You can set monthly budgets and track how much you’ve spent in individual monthly budgeting categories. It’s free, or you can pay $4.99 a month for the premium version.
YNAB (You need a budget), is a very hands-on app that will allow you to specifically allocate your income to target categories. This app also allows you to link to bank and credit card accounts to keep track of money flow. It takes a lot of maintenance and if you’re not willing to go in and enter info on a regular basis, this is not the app for you. It costs $14.99 per month, or $99 per year. You can download it in both the App Store and on Google Play.
Goodbudget is an involved platform that helps most with budgeting instead of budget tracking. It allows you to put your expenses in to “envelopes” but won’t connect to your bank accounts so you’ll have to manually add that information. You can access it from the web or from your phone. There is a free version and the Plus version costs $8 a month or $70 a year.
Every Dollar is a zero-based budget app that functions in a similar way to YNAB. Some find it simpler to use. For this app you also have to manually enter account information and you can set bill reminders and categorize transactions similar to the other apps mentioned.
This app, however is pretty expensive in comparison to the others. There is a simple free version, or you can pay $79.99 or $12.99 for the premium version.
Pocket Guard is a fairly simple app, but does allow you to connect accounts, bills, investments, and set and track your budget. It also allows you to turn off account syncing and in the “Plus” version, has a debt payoff feature. It is is $7.99 per month, $34.99 per year or $79.99 for a lifetime purchase.
Fudget is a simple “money in, money out” style budgeting app. It doesn’t use categories or charts and is fairly simple to learn. It works on any device. Though you can’t sync accounts, it’s souped up calculator style function allows you to keep track of every expense. You do have to log them all yourself though. With the “Pro” version, you can export your budget as well.
Bottom line, as a musician, you really do need to find a reliable and efficient way of keeping track of your expenses and your budget if you hope to stay afloat financially. In a future post we’ll cover deductions you can take as a musician, which is a whole discussion in itself!
