We believe music making is its own reward:
composers' primary reason for writing music is because they "have something to say." Even just one performance of a new piece of music is a privilege and honor for the composer as well as the people who hear it.
Yet composing can also be an opportunity to generate income, as part of making your living. You may be trying to write and publish music regularly, or it may be a side job squeezed in between teaching music, or playing gigs whenever you can get them, or a non-musical job (like Charles Ives!) and all the rest of life. Your composing may generate commission fees, publishing royalties, licensing fees, appearance stipends, and more, and it all seems great…until tax season arrives. The accounting side of music can often be an irksome burden for someone who just wanted to bring some beauty into this world. But fear not—there are ways to minimize this burden! Beckenhorst Press is, of course, not a licensed financial advisor or accountant, but here are some ideas from our experience that may be worth pursuing, whatever your stage of career as a composer.
- BUSINESS EXPENSES
As with any self-employment, (and at the risk of stating the obvious) keep business expenses separate from your personal expenses, and account carefully for the money that comes in and goes out. Keep a separate checking account for all your business transactions; careful and consistent use of this account will provide you with a clear annual financial record for your business. (Of course, if you accidentally use your personal account at some point, you can simply transfer money to/from the business account after the fact, to fix it.) A separate credit card for your business also helps keep business transactions clear.
For federal tax purposes, most composers will likely handle this income as self-employment, which means reporting it on Schedule C, and then paying self-employment tax (15.3%, which is essentially Social Security and Medicare taxes) on Schedule SE. This can feel like a “one-two punch” of both income tax and payroll tax. It may be helpful to set aside money through the year to be prepared for this - either by regular personal savings, or by purposely increasing withholding from another job to compensate for this increased overall tax burden (this makes it automatic so you don’t forget!).
Some self-employed composers try to report royalties from publishing or licensing on Schedule E, since it mentions “royalties“, but a careful reading of instructions for Schedules C and E (as well as conversations with tax professionals and even the IRS directly) has made it clear that Schedule E is not for composers’ royalties, even though it may seem like a desirable way to avoid self-employment tax (because composing is an "active trade or business activity", music royalties belong on Schedule C). Save yourself future headaches by not trying to take this approach.
- TAX DEDUCTIONS
There are numerous tax deductions to consider claiming, and/or expenses that can be written off - these will reduce your taxable income and therefore the amount of tax you owe. Consider any money that you pay out that might be related to developing musicianship, studying/learning/listening to music as a professional, conducting any music-business or composing related activities, communicating/networking with other musicians or clients, costs related to professional development and conferences, travel related to earning musical income or furthering your musical skill (including airfare, hotels, rental cars, or standard IRS mileage rates for use of your personal vehicle), any music study or music lessons you pay for, marketing/advertising your music or skills, etc.; all of these things may be expenses you can write off in whole or in part. Even “meals and entertainment” conducted in the course of business are partly deductible! Again, pay for all these expenses with your business checking or credit card, to keep the accounting clear.
If you have a home office or designated area of your home where you compose and conduct your music business, be sure to look into the business use of your home deduction, which will prorate multiple types of home-related expenses based on the percent of square footage that you devote to business activity.
Some basic accounting software or online systems can be very helpful both for accounting as well as keeping track of your own income, expenses, and other details. At some point you may consider paying a professional to keep your books, as well.
- SETTING UP A CORPORATION
If your earnings continue to grow,
at some point it becomes worth the investment to file as a business—for example, setting up an LLC and then filing the paperwork to report your income as an S corporation. This may sound complicated, and it does require the help and cost of a professional accountant to set this up and possibly to provide help with quarterly or annual tax filings. However, once your income reaches a certain level, this approach can save you significant money even after you pay your accountant, because you will only pay Social Security and Medicare taxes on the portion of your income that is self-designated as your “salary” for working for your business, instead of your total net income. (The IRS allows you to set your own salary when you work for your corporation; it must simply be fair and defensible if you were ever audited.)
To be clear, your total net business income still “passes through” to your personal tax return (via a K-1 form), where you will still pay personal income tax on it; but avoiding that 15.3% self-employment tax on everything but your designated salary can provide very significant tax savings.
You’ll still pursue as many tax deductions for your business as possible, just like self-employed composers. (One caveat: “business use of your home” is no longer applicable for a corporation. But at the earnings level where this approach becomes worthwhile, the other benefits significantly outweigh it.)
The big question is, of course, “At what threshold is this approach worth it?” This threshold can vary depending on your situation and state, but at some point if you are developing steady and significant revenue streams from your music making, it’s definitely worth having a conversation with an accountant.
Speaking of accountants and state taxes: be sure to ask your accountant about tax breaks for corporations in your state; some states have reduced corporate tax rates or other tax breaks for corporations.
Again, none of this should be considered professional tax advice, and it’s essential for you to talk to your own professional about all of the possibilities raised in this article, to see whether/how they may apply to you.
Beckenhorst Press has a particular interest in helping its own published composers with issues related to accounting and taxes, and we provide personal answers and help for composers in our publishing “family.” But we want to see all composers succeed and thrive, both musically and financially—and we hope this article helps!