Tax Information Every Musician Should Know

“In the world, nothing can be said for certain except death and taxes.” – Benjamin Franklin

Wise words from an intelligent man Cool! Ben harnessed electricity. As well as inventing the bifocals (helpful! The folding catheter (gross!) After all.

While taxes, deductions and reportable earnings may not be the most exciting topics for musicians they are all vital for you to understand.

Before we begin: CD Baby is not a tax professional and this article does not contain tax, legal or accounting advice. Although we will incorporate advice from some experts along the journey, the goal of this article is not to give you any tax information as it relates to your music. This article should not be relied upon for tax, legal, or accounting advice. Ask a tax expert for advice regarding your tax situation.

The second and final caveat is that the information we provide only applies to people who reside and work in the United States.

Let’s get ready to put on our green eyeglasses and grab our old-fashioned accounting calculator.

The first question that many musicians ask is:

Are I required to report my music income?

Yes. Yes. All income is reportable.

The IRS determines whether this income is taxable. You can place your music in either or .

• Business: A business created to make money.
• Hobby: A hobby that is not for profit.

How can I tell if my music is a hobby or a business?

Commonly, it is stated that if your profit was less than $400 per year, you do not need to file taxes on that income. This is not true. The IRS has a list that helps determine whether your musical pursuit is a hobby, or a business.

These nine elements are used by the IRS to distinguish businesses from hobbies.

• You can conduct the activity in a businesslike way and keep accurate records and books.
• It doesn’t matter if you have any personal reasons for doing the activity.
• It is important to determine if the effort and time you invest in the activity will make it profitable.
• It is important to consider whether you rely on the income from the activity as a source of your livelihood.
• It doesn’t matter if your losses are caused by circumstances outside your control (or if they are normal during the startup phase of your business type).
• It is important to determine if you and your advisors are equipped with the necessary knowledge to run the business successfully.
• How successful you were in past similar activities.
• How much profit the activity makes in a given period of time.
• How likely you are to realize future profits from the appreciation of assets used in the activity.

How can I find out what type of business I am in?

There are three types of business that musicians often use:

1. Sole proprietor This category is for individuals who own their business. You are a sole proprietor if you are the only person involved in the creation of your music. It is possible to be sole proprietor even though you have collaborators. You can file your personal 1040 tax return if you have earned enough income to be taxed.
2. Partnership: A partnership is a relationship between two people who do business together and consider themselves to be the owners of the creation (like a musical collaboration). This entity must file a 1065 form. This business is subject to different taxes than sole proprietors. It is possible to co-own a copyright with no partnership.
3. Corporations There’s three types of corporations: C corp, S corp, and not-profit. To calculate how much profit your band earned, you need to figure out the business expenses on a business application. The profit is then divided among the owners. The S corp owner receives a K1 form. This is a similar W2 for individuals who are part of a corporation. It also applies to LLCs. This form informs each member of the S corp what their share is in the profit and how much they have to report on their personal taxes.

How is income shared among bandmates taxed?

Many bands appoint one person to be the manager/money person. This is often an unofficial position, and often not one that they want. You could be that person.

It’s simple for musicians to fill out W-9s, but it can be frustrating for musicians. The W-9 looks like the individual who earned all of the revenue on the 1099 forms. It’s not good.

There may be a few options for you in this instance:

1. Fill in the total on your tax return then, if allowed, subtract the amounts that you paid members of your band as subcontractors. This could increase your gross income.
2. Each band member will receive 1099s. This allows them to file their individual income taxes. While this will still require you to keep track of each check and the amount paid, it means that you won’t have to file all your income taxes.

You could also form a corporation as we mentioned above, particularly if your business is already a corporation. It is a good idea to consult a tax professional or attorney about the best entity for your needs.

Tax on self-employment

Self-employment tax may apply to your business. The federal self employment tax rate is usually 15.3% of self-employment income.

This is all before deductions. That’s where the fun starts!

How can I deduct music expenses from my taxes?

Many expenses musicians incur that are not common to them can be deducted from taxes.

• Advertising: Money to Facebook ads. Hosting costs for your site. Promotional materials, flyers, and other marketing efforts for your music.

• Auto expenses: Mileage in your van, bus or rust bucket car.

There are two types:

1. Actual expenses where all mileage, repairs, and so on are tracked. Find out how much was spent on business. Then, take that percentage and put it to use for business.
2. Standard mileage rate, this is a flat rate that the IRS sets each year. This is the best and easiest option for most people. Keep track of all miles and use the standard mile rate to enter them. The standard 2021 mileage rate is 56c per mile.

• Contract fees You must report any $600 or more you have paid to someone other than a corporation on your 1099. Add the amount that you received from the agreement to the amount that you paid the person, and you will determine if it meets the threshold. You can use the 1099 section to report fees and contracts for booking agents, photography, and other services.

Tip: Ask anyone you are going to pay for something to fill out a form W9.

• Food: While you are on the road, you can deduct any food purchased as work-related expenses. You can still deduct the cost of a meal, even if you have a business conversation with someone while you eat a burger. The IRS has some criteria that will limit the deductible amount of meals to 50%.

A tip: To figure meal expenses for your business, you can use a per diem chart from the government if applicable. You can also look at your travel chart to estimate the daily cost if you haven’t kept track of them or paid cash.

• Merch: To subtract merch costs from your Schedule C, fill in the “Cost of Goods Sold” section. This is a year-over-year calculation based on what you started with at year’s beginning and what you finished with at year’s end. If you make merch for the first time and sell $1000 worth of merchandise, and have $600 in merch stock at the end, that’s $600 worth. This is your “Ending inventory”. Your deduction is the amount that you moved in the year. You can still count this even if you give away merch. It’s the value of the merch and not what it was paid for. The amount you have left over is what you use to start your taxes next year.

• Studio/home office/practice area: You can deduct your studio, or any other space in your home that you use to create music. The percent of your home you use will be required. Measure the area of the room and then calculate the total square footage in your home. Calculate how much space is needed to cover the entire home.

A tip: Rent or other expenses you may be able deduct from your housing costs.

• Internet and cell phone: Similar the area of your home studio, calculate how much of your Internet usage was used for your music business. Your Internet bill can be counted as an expense if you book a lot of shows online. If you use your phone for travel, the same applies to your mobile phone bill.

• Insurance: Many musicians have insurance for their gear. If you are paying out-of-pocket for your health insurance, you can also get a self employed health insurance deduction.

• Depreciation Music instruments depreciate over seven years. You can’t take it all off if you purchase a high-end, new guitar. It must be divided over seven years. You can use IRS Form 4562 to avoid this. Depreciation reduction is a serious issue! The IRS may require you to pay taxes if you do not take your deduction in a single year.
• Taxes You can write off a percentage of the amount you pay to someone to handle your taxes.

Tip: Even though we are talking about tax professionals, don’t hesitate to ask your tax preparer any questions. They are experts in all deductions, so ensure you have completed your forms correctly and ask for their review to determine if there are any additional deductions.

For the most current information about deductibility of business expenses, please refer to the IRS resources Schedule A and Deducting Businesses Expenses .

What are the differences in tax rules for musicians around the globe?

All of the tax information above applies to work in the U.S., as we stated at the beginning. What if your music is earned in other countries?

You may have to pay taxes in another country if you work in another country. Many countries have tax treaties with one another via the OECD Model Tax Convention.

Tax treaties between countries vary from one country to the next and from pairing to pairing. To summarize, if you are a musician in another country, it is best to consult a tax professional to determine what taxes to pay. This is the main lesson: Always consult a tax professional before you file taxes for music.

While we are on the topic of international taxes for music revenues…

Withholding tax for U.S. artists and non-U.S. musicians

According to the IRS, taxes may be withheld on income from the United States that is paid to artists not from the United States.

No matter where you are, tax withholding laws can change. These withholdings could be applied to income sources like streaming or sync licensing.