Our federal government is empowered to tax the income earned by its citizens, which it does via the Internal Revenue Service. Additionally, each state government may impose a tax on income earned while doing business in their state (a.k.a. “State Income Tax”), as well as tax its residents for buying and owning goods in their state (a.k.a. “Sales and Use Tax” and “Property Tax” respectively). Counties and cities may also tax those who are
residing and/or doing business within their jurisdiction. It’s each taxpayer’s responsibility to determine which state and local tax laws apply. Because state and local tax law varies so much, this discussion is limited to issues regarding federal income taxes only.
work, is taxable income. One way the federal government makes sure you’re not receiving income “under the table” is to require the entities paying you (record labels, publishing companies, night clubs and venues, etc.) to report to both you and the IRS how much money they paid you during the year. This is done via Federal Form 1099-MISC, which you would generally receive by January 31st following the end of each tax year.
Don’t worry about opening up Swiss bank accounts; as a U.S.
citizen, your “world-wide” income from all sources is considered taxable income. We frequently read about famous musicians who “ forgot” to report taxable income and ended up having to pay big money to (or do big time for) Uncle Sam for their forgetfulness. Income you receive, whether from club dates, wedding gigs, music lessons, session work, drum-loop programming, royalties or any other music-related
A common fallacy is that every dollar a musician spends is a tax deduction (more commonly known as the “write-off”). Many people are under the assumption that the more money you lose at your musical business, the better off you are, because those losses can offset other income on your tax return. This is not true. If you lose money at your business for too many years in a row, the IRS doesn’t consider it a business anymore; it is now merely a hobby. After all, who in their right mind would continue to operate a losing business? The costs involved in pursuing a hobby are deemed personal, and are not deductible no matter how promising your album project is. By the way, is the term “album” still acceptable?
The Right Way To Write Off Let’s assume your music career is truly a business. You can ben-
Alan Friedman is a CPA and Senior Partner with the accounting firm of Friedman, Kannenberg & Company, located in West Hartford, Connecticut. He holds a Bachelor and Masters degree in Professional Accounting, and has been employed by United Technologies and the international accounting firm of Ernst & Young. Alan and his firm have extensive experience in providing accounting, tax and consulting services to the music industry, servicing professional musicians and bands, music stores, instrument and product manufacturers, recording studios, music schools and other music industry professionals. Alan has written for International Musician, Music Inc. and Music & Sound Retailer magazines. Alan’s firm is a member of the National Association of Music Merchants (NAMM), the Retail Print Music Dealers Association (RPMDA), the National Association of School Music Dealers (NASMD), the American Music Conference (AMC) and the National Association of Certified Valuation Analysts (NACVA). Alan is the host of NAMM’s interactive “Financial Management” CD-Rom and many of NAMM University’s new online courses.
He resides in West Hartford, Connecticut with his wife and three children.
In his spare time,
he records music in his basement studio ( www.alhomeboy.com) and plays lead guitar in the all-CPA rock band “The Accounting Crows” (www. accountingcrows.com) and the print music industry band “Printz.” E mail Alan at money@drumheadmag.com.
References:
Archives