"The hardest thing in the world to understand is the income tax."
- Albert Einstein
Taxes are a collection of revenue from citizens to fund the government. Many people view taxes as government penalties. I prefer to view them as government incentives. As far as I can tell the government adjusts the tax code to fit their needs economically. For example, if the government wants corporations to thrive then you might see local, statewide, or nationwide corporate incentives in the form of credits, abatements, exemptions, or refunds. If the government wants people to buy more homes then you might see a mortgage interest deduction.
Taxes exist and musicians are subject to them. I remember a professional jazz artist speaking at The University of North Texas lecture series who said paying your taxes is the single most important thing to do as a musician. I've heard horror stories of musicians ignoring their taxes including some who haven't been caught (YET.) Below I cover the basics and potential misconceptions of taxes in America so musicians have a better understanding going forward.
For starters, refer to the IRS (Internal Revenue Service) for all things taxes.
Tax brackets refer to your taxable income. In 2018, if you earn $100K (unmarried) then you would be in the 28% bracket. That doesn't mean you owe 28% of $100K. It means the first $9,525 is taxed at 10% ($952), the next $29,175 is taxed at 15% ($4,376.25), the next $55,000 is taxed at 25% ($13,750), and finally the leftover $6,300 is taxed at 28% ($1,764) totaling to $20,842.25 you would owe in taxes which equates to about 20.8% of your income that year.
Deadlines for filing taxes are typically on April 15th unless that day falls on a holiday. There is an option to extend the deadline which would require you to file on October 15th (again unless that day falls on a holiday.)
Musicians are typically considered sole proprietor/independent contractors also known as self-employed. When earning income from multiple sources we typically receive one of two forms from each source for tax filing. These include the Form W-2 and Form 1099-Misc. In short, a W-2 means the employer is withholding a portion of your income for social security, medicare, and income tax. A 1099 means the employer does not withhold income and you are responsible for paying taxes on the income. Most one-time/short-term gigs use a 1099 whereas a church or school with a long-term/yearly contract might use a W-2.
The difference between a tax deduction and a tax credit is very important. A tax deduction is an item you can deduct from your income. For example, if I make $100,000 in one year and qualify for deductions totaling $20,000 then my year end income would show as $80,000 instead of $100,000 lowering my taxes from $20,842.25 to roughly $15,650. A tax credit subtracts from the amount of taxes you owe. For example, if I owe $15,650 in taxes and qualify for a credit of $1,000 then I would only pay $14,650 in taxes that year.
Examples of tax credits:
- Earned Income Credit
- Child and Dependent Care Credit
- Adoption Credit
- Mortgage Interest Credit
- Low-Income Housing Credit
- Premium Tax Credit (Affordable Care Act)
Examples of tax deductions:
- Mileage or Car Maintenance
- Home Office and Supplies
- Meals (50%)
- Depreciation of Instruments/Equipment
- Student loan interest, Tuition and Fees
- Educational expenses
- Charitable contributions
I filed online through TurboTax for the first few years of my career. This year I am switching to a trusted CPA (Certified Public Accountant) now that I own property and earn higher income. I encourage you to learn more about taxes and seek professional advice of your own.
DISCLAIMER: Please keep in mind I am not a certified tax advisor. This is simply my experience with taxes in America as a freelance musician.
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