Tax Tips for Musicians

“Voluntary Compliance is Mandatory”

It is again that time of year when we must face one of the certainties of life. Income taxes! To most of us, this is indeed, worse than the other certainty. Death! However, it doesn’t have to be that way.

Of all the countries in the world that do have some form of taxation, the United States of America impose some of the lowest income tax percentage rates in the world. This fact should not go un-noticed. We are still able to keep quite a bit of what we earn.

There are many ways that we, as taxpayers, can find that will help to further reduce our tax bill. However, to help ourselves, we must have a basic understanding of the tax laws.
This understanding starts with self education. It is here that we begin the education process. The number one point to remember is that to avoid a tax is legal, to evade a tax is illegal.

The Internal Revenue Service (IRS) requires that all taxpayers keep records, both personal and business. In order to keep records, one must have some self-discipline and some degree of organization. We must make the effort to save (and be able to locate) this information in order to prepare a tax return and possibly prove a point(s) if audited in the future. Some folks use one of the many software titles that are readily available to help. Some use accordion style folders. While others, use the shoe box or grocery bag method. Any system or method is better than none. Just ask someone who was disorganized and audited. An audit is a process that requires a taxpayer to prove some or all of their income or expense claims as reported on a prior tax return. The IRS will not accept the excuse from a taxpayer saying, “but I didn’t know.” As United States citizens, we are expected to know. Hence the title for this article, voluntary compliance is mandatory.

Information concerning income taxes is more available and more accessible than ever before. This is a direct result of the World Wide Web. The IRS has developed a terrific web site where information is just a click away. (www.irs.gov) The states, that have an income tax, also have web sites to assist the taxpayer. Most of these web sites have built in search engines to help the taxpayer locate the specific information that they seek. As always, your accountant is a good information resource relating to tax questions. The latest figures available suggest that about 58% of all taxpayers engage a tax professional to assist with the preparation of their tax return. Their rationale is clear. They simply want to reduce the risk of being audited.

Four years ago, I monitored IRS audits that were performed on two of my clients. One client is a performing artist, and the other an inde record label. Each client was extremely stressed out about it, and understandably so. I prepared both of them for their task on what they should do, how they should do it, when they should do it, and finally what not to do. I am pleased to report that neither client was charged with additional tax or penalty fees. These two clients listened to advice, employed the techniques, and came away none the worse for it. They have learned about the importance of compliance.
So what should you be doing? It is advisable to save information regarding income and expenses for 7 years.

Income information

Whether playing in a garage band, a marquis act or an independent performing artist the concepts are the same. One must keep track of, and report, all income earned during each year from performances, merchandising, royalties and publishing etc. Keeping bank statements is also a good idea.

Expense information

Obtain and save receipts for all expenses that are related to your performances, merchandising, royalties and publishing etc. Keeping bank and credit card statements is a good idea as well. If you have cash performance travel expenses, pay special attention to this area.

If you travel quite a bit and it is difficult to store all of this information while on the road, the solution is simple. Mail, ship or e-mail the information back home to a spouse, a parent or a trusted friend.

By Marty Dennehy

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Comments

2 Replies to “Tax Tips for Musicians”

  1. Bobby Reynolds says:

    What is the best treatise regarding taxation of the music industry?

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