Let’s assume that anyone reading this knows that the sum total of all the money an individual earns is called the gross. It is reported by your employer to the Federal Government in the form of a wage and tax statement called a W-2, and a copy is sent to you each January for the previous year’s work. It shows wages earned and taxes taken out by your employer. In contrast, for self-employed income you receive a 1099 MISC form, but if you are a private music teacher, for example, you will not receive a form and consequently you must keep track of your total income yourself. The person or entity who hires you as an independent contractor is required by law to send the 1099-MISC if you were paid $600 or more in the calendar year. Since you are not on a regular payroll, no taxes will be taken out, but nonetheless you will be responsible for them at tax time. It is a misconception that if you do not receive a 1099 and make less than $600 you don’t have to report it. As a U.S. citizen, income from all sources is taxable regardless of the amount and where it is earned in the world. Here’s a case in point.
A former student of mine took a cruise ship job right out of college. He worked on the ship the better part of a year. For some reason he didn’t receive a 1099 from the employer, but the income was reported to the Internal Revenue Service. (My guess is that the cruise ship line had an old address for this person and though it was mailed, the form never got to him.) Anyway—my student thought there would be no tax due, since he was “at sea.” Guess again, Sinbad. The IRS caught up to him and hit him for the tax due on his earnings plus interest and penalties! The amount was substantial and he had to make arrangements with the IRS to pay it back over time. In truth, he was lucky not to have been slapped with a fraud charge.
So, we all have our income reported to the IRS via W-2 and 1099 forms, with copies sent to us. Looking at the W-2 you will see in box 5, “Medicare wages and tips.” The number found there is the gross—the total amount you made from that employer. If you contributed to a retirement account such as a 401K or 403b, that amount will be deducted from your gross (box 5) and the remainder will be shown in box 1(wages, tips and other compensation). There are many benefits to reducing your gross income by contributing to a retirement account, because you get to pay less taxes and the money in the account grows tax-free. (But that’s a subject for another blog.)
In order for you to pay less tax (your goal) you must get your total income down to a lower level. Claiming deductions does this. Many tax filers take the standard deduction, and for tax years 2018 through 2025, it will be $12,000 for single filers and $24,000 for married couples filing jointly. That’s close to double the levels in 2017. But, if you have deductions exceeding these amounts it would be wise for you to itemize.
Some deductions, such as student loan interest and certain retirement plans, directly reduce total income. These deductions are called “adjustments” and after subtracting them from total income, the result is Adjusted Gross Income. Other deductions, like contributions to charities, state and local taxes (limited to $10,000 after 12/31/17), mortgage interest, loss from fire or theft (but not after 12/31/17 unless in a federally declared disaster area), and medical expenses in excess of 7.5 percent of your adjusted gross income (but scheduled to increase to 10 percent of adjusted gross income for tax years after 2019), are available to all tax filers. They are called Itemized Deductions. While all taxpayers may deduct the above expenses, the Republican tax bill effective January 1, 2018 eliminated the ability for employees to deduct non-reimbursed employee business expenses. Because most musicians tend to have more non-reimbursed expenses than other types of employees, this provision in the new bill will likely cause higher taxes for musicians who are employees (read: orchestra musicians). However, these expenses remain deductible for non-employees such as independent contractors whose income is reported on form 1099-MISC. Music teachers, club-date or casual musicians and other self-employed individuals, as well as partnerships and corporations fall into this category. While all taxpayers may deduct non-reimbursed employee business expenses, musicians tend to have more expenses, many of which are unique to them. Here are a few:
- Office in Home
- Supplies—items such as drumsticks, reeds, strings, cables and office supplies
- Concert tickets
- Recording costs
- Accounting fees
- Lawyer fees (only business related or to produce income)
- Music books and recordings
- Internet access and email (subtract any personal use)
- Subscriptions to trade magazines
- Telephone—have a separate business line (Your primary phone line is not deductible, but features may be, like call waiting, messaging, etc.)
- Lessons and coachings
- Education expenses—things that will further your career
- Instrument repair