“In this world nothing can be said to be certain, except death and taxes.” — Benjamin Franklin
Wise words from a wise man. Ben did harness electricity (cool!), as well as invent the bifocals (helpful!) and the folding catheter (gross!) after all.
And while taxes, deductions, and reportable earnings aren’t the most exciting topics for musicians, they’re all important for you to know.
One HUGE caveat before we get started: None of us at CD Baby are tax professionals and this is not tax, legal, or accounting advice. While we will be incorporating advice from a few experts along the way, the purpose of this article is to impart some basic information on taxes as they relate to the music you create. This article is not intended to provide, and should not be relied on for, tax, legal or accounting advice. For advice pertaining to your tax situation, please ask a tax expert.
Second and final caveat: All the information we’re covering only applies to individuals who live and work in the U.S. Other countries around the world have their own unique tax rules.
Okay, let’s don our green eyeshades and grab our old-timey accounting calculator and get to work!
First, the big question many musicians have:
Do I have to report income from music?
Yes. According to the IRS, if you make money for something you did then you may be self-employed and that income is reportable to the IRS. It doesn’t matter if the income is revenue from Spotify streams, CD sales, or ticket sales on tour. It’s all income and it’s all reportable.
The IRS determines if this income is taxable by placing your music in one of two categories:
- Business: An entity created for the purpose of making money.
- Hobby: An activity not engaged in for profit.
How do I know if my music is a business or hobby?
It’s commonly stated that if you made less than $400 in profit in a given year, then you don’t have to file business taxes for that income. However, that’s not entirely true. The IRS has a list of criteria to determine if your musical pursuit is a hobby or business.
The IRS outlines these nine factors in differentiating businesses from hobbies:
- Whether you carry on the activity in a businesslike manner and maintain complete and accurate books and records.
- Whether you have personal motives in carrying on the activity.
- Whether the time and effort you put into the activity indicate you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
- Whether you were successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
How do I know what business I am?
Three common business types for musicians are:
- Sole proprietor: Like its name suggests, this category is for people doing business on their own. If you’re the only one involved in creating your music, you’re a sole proprietor. You can also be a sole proprietor even if you work with collaborators, depending on the situation. If you earned enough revenue to be taxed, you file this on your personal 1040 tax form.
- Partnership: Two people doing business together and who both consider themselves owners of what’s created (like a musical collaboration) are considered a partnership. This type of entity files a 1065 form. Different taxes apply to this business than sole proprietors. Remember, it’s entirely possible to be co-owners of a copyright without being a partnership.
- Corporations: There are three types of corporations: S corp, C corp, and non-profit. As a band, you must figure out business expenses on a business form to determine how much profit you all earned. You then split that profit among the owners. Each owner of the S corp gets a K1 form, which is like a W2 but for people as part of a corporation (this also applies to LLCs). This form tells each member what their share of the profit is and how much they report on their personal taxes.
How are you taxed on income shared with bandmates?
Bands often appoint one member as the unofficial (and often unwilling) manager/money person. If that’s you, chances are a venue or other payor sent you and you only a W-9 to fill out for income that you then have to share with your entire band.
While it’s easy for payors to do this, it’s inconvenient for the musician filling out the W-9 because it looks like all the revenue on the 1099 form was earned by that one individual. Not good.
You may have a couple options in this case:
[But remember, this isn’t tax advise, and you should ask an expert which approach is applicable for your situation]
- File the entire amount on your return, and then, if allowable, deduct the amounts you paid your band members as if they were subcontractors. Of course this may inflate your gross income.
- Issue 1099s to each individual band member so they can file their respective income on their own. This still requires you to keep records of what was paid out on each check, but at least you’re not filing all that income on your taxes.
Of course, you could just form a corporation like we discussed above, especially if you’re already considered a business. You should consult with an attorney or tax professional about which entity best suits your needs.
Your business may be subject to self-employment tax. The federal self-employment tax rate is generally 15.3% of self-employment income.
All this is before deductions, and that’s where the fun begins!
What music expenses can I deduct for taxes?
Musicians pay tons of expenses that are unique to them, many of which can be deducted from their taxes:
- Advertising: Money for Facebook and Instagram ads. Hosting costs for your website. Fliers, promo materials, and other efforts to promote your music.
- Auto expenses: Mileage spent in your van, bus, rust bucket car, whatever.
There are two types of mileage:
- Actual expenses, where you track all miles, repairs, etc. Then find how much was used for business. Take that percent and use for business the expense.
- Standard mileage rate, which is a flat rate the IRS determines each year. This is the easiest and best option for most people. Track all miles each year and enter that with the standard mile rate. The 2021 standard mileage rate is 56 cents per mile.
- Contract fees: If you pay $600 or more to anyone who is not a corporation, report that on your 1099. To determine if the amount meets that threshold, subtract the amount of money you made from the agreement from the amount you paid the person and report that revenue. Use the section on your 1099 for contracts and fees for booking agents, photography, etc.
Pro tip: Before you pay anyone out, ask them to fill out a W9.
- Food: If you’re out on the road touring, any food you buy is work-related and you can report that expense. Even if you go out and have a business discussion with someone over a burger, you can deduct that meal. Meals are only 50% deductible and are subject to certain criteria as per the IRS.
Pro tip: If applicable, you can use a government per diem chart for businesses to figure out meal expenses. If you forgot to track those or paid cash, you can look at your tour chart and estimate the cost per day.
- Merch: To deduct merch costs, fill out the “Cost of Goods Sold” section on your Schedule C. This is calculated year-over-year by what you started with at the beginning of the year and what you ended the year with. For example, if this was your first year making merch and you made $1000 worth of product and sold $400 worth of merch, you have $600 worth of merch left over at the end of the year. That’s called your “Ending inventory.” Your deduction is the amount you moved that year. This counts even if you gave away some merch, because it’s what the merch was worth, not what someone paid for it. When you do taxes next year, you begin with the amount left over.
- Home office/practice space/studio: To deduct your home studio or any space in your house you use for creating music, that space must be exclusively used for making music. You’ll be asked to enter the percent of your home that is used. To find that, measure square footage of the room, then find the square footage of your entire home. Calculate what percent the space takes of the entire area of your home.
Pro tip: You might be able to deduct rent or any expense you pay for that percentage of your housing.
- Internet or cell phone: Similar to the square footage of your home studio, figure out what percent of your Internet use was for your music business. If you spend lots of time booking shows online you can count your Internet bill as an expense. The same applies to your cell phone bill if you use your cell phone to occupy time when on tour.
- Insurance: Lots of musicians take out insurance on their gear. You can also take a self-employment health insurance deduction if you’re paying out of pocket for your health insurance.
- Depreciation: Musical instruments are depreciated over seven years. If you buy yourself a fancy new high-end guitar, you can’t deduct it all in one year. You have to split it up over seven years. If you really want to get around that, you can fill out IRS Form 4562. Be careful of depreciation reduction! If you take your deduction all in one year and stop playing music before the seven years is over, the IRS can make you pay taxes on it.
- Taxes: If you pay someone to do your business taxes you can write off a portion of that.
Pro tip: While we’re talking about tax experts, don’t be afraid to ask your tax preparer questions. They know all the deductions you can take, so make sure you did your forms right and ask them to review them for any other deductions.
How do musician tax rules differ around the world?
Like we said at the beginning, all of the preceding tax information applies for work in the U.S. But what if you earned revenue for your music in other countries, like if you’re from the U.S. and played some shows in Europe?
When you perform in another country, you may be required to pay taxes in the country the income is sourced to. In many cases, countries have agreements called tax treaties between one another through the OECD Model Tax Convention.
Tax treaties between countries differ from country to country and pairing to pairing. The short answer: if you play music in another country, consult a tax expert to sort out what to pay. Really, that’s the lesson in all of this: always ask a tax professional before filing taxes for music.
But while we’re on the subject of international taxes for music revenue…
Tax withholding for U.S. and non-U.S. artists
As per the IRS, tax withholding may be applied on payments of U.S. source income to non-U.S. artists.
Tax withholding laws change whether you’re inside or outside the U.S. Withholdings may be applied to payments from income sources such as streaming and sync licensing.
Quick note: This is not to be taken as tax advice. Since tax rules change over time and can vary by location and industry, consult a CPA or tax advisor for specific guidance.