Often you’re classified as an independent contractor.
Sometimes you’re an employee.
You might be paid cash-in-hand, or you might receive a wage, complete with all the necessary deductions made on your behalf.
And you’ll typically have numerous sources of income, from record sales and live performances, to downloads and merchandise.
In short, tax planning for musicians can be incredibly complex. And to avoid mistakes – and the penalties that go with them – you need to work with an accountant experienced in the entertainment industry.
In this post, we’ll share some of our top tips for tax planning for musicians.
Start planning early
You don’t have to look far to find examples of notable musicians running afoul of the IRS. It’s easy to dismiss those stories as simply millionaires playing fast and loose with tax law; they’ll pay a fine and be on their way.
But the truth is, these celebrities are often paying the price for poor financial habits they picked up early in their careers. It’s important that you avoid going down the same path. Even if you’re only now embarking on a career as a professional musician, it’s vital that you approach tax planning with discipline from the outset.
Keep your records tidy
And no, we don’t mean your vintage vinyl collection.
As a professional musician, you’ll very quickly realize that your income is made up of several different revenue streams. These can include:
- Concerts and live performances
- Sales of CDs, vinyl, and digital downloads
- Income from streaming sites, such as Spotify
- Song placements in movies, TV shows, or commercials
With such a variety of potential revenue streams, all with their own individual contracts, terms, and deductibles, it’s crucial that you keep up-to-date financial records. Doing so will also help you handle the fluctuating cash flow concerns so often associated with the music industry.
Know what you can (and cannot) claim
Just as there are a number of ways in which you can make money as a professional performer, there are also a number of ways you can minimize your tax liability.
But first, you need to know what you can and cannot claim as a deduction. And this can be quite challenging.
For instance, if you’re an up-and-coming folk troubadour, your purposefully messy haircut won’t be deductible, nor will your Dylan-esque trendy leather jacket. However, your guitar strings are. And if you’re in a Beatles tribute band, your 60s era Lennon or McCartney haircut could be argued as a valid deduction, along with that dry cleaning bill for your Sgt. Pepper suit.
This is precisely where an experienced entertainment accountant comes into their own. With so many seemingly unconventional deductions, you need to know which ones can be tied directly to the work that you do.
Your accountant will ensure you have all the necessary documentation to prove you’re claiming for the correct amounts, and they’ll also be on hand if your occasionally bizarre (yet valid) claim triggers an audit.
Tax planning for musicians will typically involve deferring income and carefully preparing records to minimize liabilities, and maximize deductions.
You also need to consider whether or not you’d be better served by setting up a separate corporate entity through which to funnel your income for tax and liability purposes. And if you make it big and start touring internationally, income earned globally means yet another layer of complications.
Add to that wealth management, retirement planning, and estate planning, and you’ll see that a musician’s relationship with finance is a great deal more complex than perhaps you would have imagined.
Ready to get started?
Whether you are naturally gifted or you worked hard to master your instrument, making a living from music is incredibly exciting and rewarding.
But it’s also very challenging, and that challenge is made all the more difficult if you don’t adopt a serious and disciplined approach to tax planning.
If you need help making the transition from amateur musician to professional performer, we can help. Our team of experienced entertainment accountants are ready to advise you on how to efficiently minimize your tax liabilities, and maximize your earning potential.
To find out more, speak with one of our dedicated business advisers. Contact us today.