You know what they say, nothing in this world is certain, except death and taxes. The saying also applies when it comes to being an independent musician. Whether your music projects are your primary source of income, a side gig, or just a hobby, if you make money from your music, you’ll have to make sure you’re doing it legally, and this involves knowing - and paying - your taxes.
The music industry is a complex business, and figuring it all out as an independent artist can be daunting, but it’s not as complicated as you might think. You just need to know the basics of how the tax system works, and where you fit into it, and make sure you’re always up-to-date with your payments to avoid legal trouble. You’ll also want to know what is deductible for an independent artist and make the best of the advantages that come with being a professional musician.
We’ll go over the most important things that independent artists should know when it comes to taxes and deductibles in the U.S. It’s important to note here that every country operates on a different legal system, so if you spend a lot of time working abroad, you might want to check the tax requirements in each country you visit.
Do you have to report income from music-related activities?
Making a living off of your art and traveling across the country to perform your music can be incredibly rewarding, validating, and gratifying. However, you must not lose sight of the fact that it’s also a job, a business venture, subject to the same laws as any other type of business. Even if music is just a hobby or an after-work side gig that doesn’t bring much income, you’re still subject to tax rules and you’ll need to familiarize yourself with the folks over at the IRS (Internal Revenue Service).
According to the IRS, if you make money off of music, even if it’s not a lot of money and you’re an independent musician, you’re considered self-employed, and you need to pay taxes. It doesn’t matter if that income is the result of Spotify or Apple Music streams, tour ticket sales, merch or CD sales - it’s all reportable and you could get in legal trouble if you don’t pay the required taxes for it.
The IRS tax rules state that if your net self-employment earnings from music-related activities exceed $400, you’ll have to pay tax on that income. So, it’s important to file your self-employment earnings on time as an independent musician. But what if music is just a side gig for you, or a hobby?
Is music a serious career path for you or just a hobby?
The IRS will place you in one of two categories to determine if you’re required to pay tax on your music-related activities. They will categorize you as either a business, where your activity’s purpose is to make revenue, or a hobby, meaning your music activity is not focused on making profit.
To figure out if your music activities fit into the hobby or the business category, the IRS provides a number of factors to help differentiate between the two, as follows:
- Do you carry your music-related activities in a professional, business-like manner, and keep accurate books and records of your earnings?
- How much time and effort are you putting into this activity? The more time you invest in your career, the higher the chances that you will profit from it;
- Do you depend on your music-related income to make a living?
- Did you undertake similar activities in the past, and were they profitable?
Obviously, if music is your only source of income, then chances are you’re serious about pursuing a long-term, successful music career, and make a living off of it, in which case you will undoubtedly need to pay taxes as a business.
If you’re just starting out as a musician and are working on music projects as a side gig while still having a day job, things are a bit different. In this case, you’ll be able to report net losses when filing your tax returns for the first years of your new business venture, and get tax deduction on these losses.
Just like with any startup, or new business, the first few years might be rough, and you might not be making much profit as you build your reputation as an artist and grow your network of industry connections. There might be expenses as you start building your music career, such as setting up a website, buying recording equipment, a laptop for music production, musical instruments, and so on. You’ll be able to deduct some of these expenses from your taxable income, to avoid running out of capital before you even start being profitable.
What type of music business do you run?
Now that you’ve established whether you are required to pay taxes on your music-related activities, it’s time to figure out what type of business you’ll be running. When it comes to musicians, there are typically three categories:
- Sole proprietorship: this is the category for independent musicians doing business on their own, without a record label, a co-writer, or band members. If you’re the only creator behind your music, aka a singer-songwriter, then you’re the sole proprietor of your business. In this case, you’ll have to file a personal 1040 tax form.
- Partnership: if you’re part of a musical duo, like The White Stripes, for example, then you’re both proprietors of your music business venture, in the form of a partnership. In this case, different tax rules apply, so you’ll need to fill out a 1065 tax form.
- Corporation: if you’re part of a band, you’ll have to file taxes either as an S corp, C corp, or a non-profit, depending on your expenses and the profit you earn as a group. That profit will then be split among the members of the band; each owner of an S corporation will receive a K1 form detailing how much their share of the profit was and how much they need to report on their personal tax forms.
If you’re an independent musician doing business on your own, you can choose to register as a corporation or a limited liability company (LLC) once your career gets off the ground. This can be helpful if you’ve got other people working for you and can build a professional image in the eyes of the IRS. Registering as an LLC is also a good idea because it protects your personal assets in the case of a legal battle or lawsuit against your business.
What about a business bank account? Do you need one?
There’s no legal requirement to set up a separate business bank account as an independent musician, but it’s what we recommend anyways. By using a separate account for your music-related financial activities, it’ll be easier to organize and analyze your earnings for accounting purposes, and it will also make your business more legitimate in the eyes of the IRS in the case of an audit. Having a separate credit card to use for deductible expenses might also make it easier to keep track of your business activities and keep them separate from your personal expenses.
What kind of expenses are deductible for professional musicians?
As an emerging musician, you’ll have to invest a lot of money in getting the right equipment to get your career off the ground and build a profitable business. From laptops, keyboards, musical instruments, and microphones, to software, accessories, website domains, and digital subscriptions, you might find yourself running out of capital fast. The good news is that many of these expenses can be deducted from your taxes, including:
- Traveling expenses, based on your mileage
- Advertising, including website hosting, Facebook and Instagram ads, fliers, and all other promotional materials
- Tour meals and business lunches: food bought on tour is considered work-related, and the same goes for business lunches or dinners where you discuss potential collaborations or contracts
- Merchandising costs
- Internet and cellphone usage, when you use them for business-related activities
- Home studio expenses: you can calculate the square footage of your home recording studio or the space you use solely to work on your music, and you might be able to deduct part of your rent
- Insurance: music gear and instruments can be expensive, and they can be easily damaged while traveling on tour or during a house fire or flood, in which case, you’ll probably want to insure them. You can take a self-employment insurance deduction to cover some of the costs in this case.
How to track your expense for tax-filing purposes
Keeping track of all your expenses as a musician can seem challenging, but if you’re organized and you plan ahead, it should become second nature in no time. Here are some tips to help you in this process:
- Use accounting software: don’t try to figure out your financials on your own, because the slightest error might throw off your entire tax-filing process. Use dedicated software like QuickBooks or Xero to streamline this process and automatize some of the processes.
- Categorize your expenses: spread out your expenses according to categories, like studio rental, traveling, equipment, marketing, and so on. This will help you keep everything organized and accurate.
- Log your miles: keep a mileage log if you use a car for music-related traveling, like touring or business meetings and so on. Then you can deduct a standard mileage rate on your tax return.
- Track home office expenses: if you record music or run your music-related business from home, keep track of utilities, percentage of rent or mortgage, internet usage, property taxes, and more. You might be able to deduct some of those expenses.
- Keep detailed and accurate records: save receipts, contracts, invoices, and any other business-related documents. You never know when you might need them for tax filing or deducting purposes, or for a potential audit.
- Consult with a tax professional: even if you’ve got it all organized and figured out on your own, it’s still a good idea to consult with a professional to see if you’re doing everything right and following the latest tax regulations.
Frequently Asked Questions
What can performers claim on tax?
Performers can potentially claim various expenses on their taxes, including but not limited to costs related to their artistic activities. This may encompass expenses for musical instruments and equipment, studio rental, travel to performances, accommodations, meals during business-related travel, promotional materials, professional fees (such as agents or managers), and even a portion of home office expenses if applicable. It's essential for performers to maintain detailed records, keep receipts, and consult with a tax professional to ensure compliance with relevant tax laws and to maximize eligible deductions.
Can you use Spotify as a tax write off?
Whether you can use Spotify as a tax write-off depends on the specific circumstances of your music-related activities and how you use the platform. If you are a musician or a music professional and use Spotify as a tool for research, staying informed about industry trends, or analyzing your own work or that of others for professional development, you might be able to include the subscription cost as a deductible business expense. However, if you use Spotify solely for personal entertainment, it wouldn't typically qualify as a legitimate business expense for tax purposes. It's crucial to maintain clear records and consult with a tax professional to determine the eligibility of specific expenses in accordance with tax regulations.
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