Tax Day this upon us. The days leading up to it can be a flurry of stress and difficult decisions for anyone. This is particularly true for the artists and songwriters making a living in the music industry.
That’s because one of the most common tax mistakes artists make is simply not paying taxes on income made from their music. Artists often assume that (a) someone else is paying their taxes for them, as if it were a normal W-2 employment situation; or (b) they were paid cash and assume it won’t be reported to the IRS.
But self-employment tax is due if the artist earned $400 or more a year as an independent contractor. I’ve known several artists and songwriters that did not pay their self-employment taxes, and the result was that the IRS garnished their royalty payments.
This means royalty income bypassed the artist/writer and went straight to the IRS until the tax debt, penalties, and interest was paid in full. Willie Nelson is one of the most infamous stories, in which federal agents seized various assets to satisfy Willie’s estimated $32 million tax debt.
I’m no tax expert, so hiring a trustworthy and experienced accountant to help navigate the choppy waters of self-employment is good wisdom. Especially in light of the new tax law, professional tax guidance is worth the expense to avoid disastrous consequences.
But for now, here’s how you can prepare for Tax Day and avoid the same:
Pay estimated self-employment taxes throughout the year based on gross income.
Most of the creative workforce in the music industry is under independent contractor status. For example, an artist is not an employee of the record company or the concert venues they perform in. Therefore, the artist is responsible for their own taxes throughout the year, both income (based on tax brackets) and self-employment (FICA, Medicare, etc.).
If you wait to pay all your taxes for the year in your return, it can result in underpayment penalties. So many self-employed individuals pay estimated taxes.
Save 25% to 40% of gross income, quarterly.
The consequences of a payment not received or postmarked on or before the due date result in late penalty fees and interest tacked onto the original amount. And unless an artist can pay all of the estimated taxes a year in advance, the IRS is not cool with one lump sum tax payment for the year. The consequences of paying one lump sum on April 15th can result in more penalties and interest that can carry forward to the next tax year.
Since you’re responsible for estimated tax, setting aside 25% to 40% of your gross income for estimated tax payments is a good idea. If you’re expected to pay $1,000 or more a year in taxes, then quarterly estimated taxes are due. Plan ahead!
Keep good detailed records of all expenses.
Self-employed people typically file a Schedule C which lists all expenses of a self-employed business. If you’ve paid estimated tax throughout the year, it is much more likely you can break even or receive a tax refund based on the Schedule C expense deductions.
If you paid any other independent contractors $600 or more in a year (for example studio musicians, producers, mixing and mastering engineers), the IRS will require a 1099-Misc Form to qualify for those expense deductions. In other words, keep track of those big expense items, because you’ll need the documentation to get the deduction.
The most common mistake here (a) getting greedy with expense deductions; or (b) taking deductions without proper documentation.
An example of the first is trying to deduct your entire mortgage if you use only single room exclusively for business purposes (like recording and producing). You can only deduct a portion of your mortgage payment as a business expense. This portion is based on the room’s square footage relative to the entire house. You can’t just deduct the entire home mortgage.
An example of the second would be paying a mastering engineer $10,000 in fees, but not issuing or filing a 1099-Misc to properly document the expense. Big expenses look suspicious without any 1099-Misc documentation, which could flag an audit.
What’s more, if you show a loss for multiple years in a row, the IRS can reclassify your business a “hobby,” which means you can’t deduct losses as a business anymore.
So the moral of the story is:
Set aside a nice cushion of estimated tax payments
Pay them quarterly
Keep good expense records
… ALL of course under the guidance of an experienced tax accountant. If these simple steps are followed with diligence and integrity, there should be nothing to fear on “Tax Day.”
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We created this guide to answer a simple question: How do songwriters support themselves?
The answer is not as simple as we’d like, but our goal is to make it as clear, transparent and understandable as we possibly can.
Songtrust is more than just a rights management platform and publishing administrator - we’re a team of experts in the music community who strive to educate, support, and provide thought leadership to creators, representatives, and businesses across the music industry.
Our hope is that you’ll finish this guide with an better understanding of the business behind songwriting and have actionable resources to help you be successful.