46: Taxes need not stress you out: 5 things you need to know

with Dr. Jeffrey Nytch

I’ll never forget the first time I filed a tax return. You had to go down to the Post Office, where there were stacks and stacks of forms waiting for you, and pick out the ones you thought you’d need. Then you headed home, set down the forms on your desk… and freaked out. 

I was one of the lucky ones: I was more organized than most people I knew. I kept all my receipts, bank statements, and cancelled checks in a plastic bin. (If you don’t know what cancelled checks are, don’t worry: they’re a thing of the past!) I also had some idea of what expenses I could deduct. But when faced with those forms, printed on recycled newsprint with their charcoal and robin’s-egg-blue boxes, even the stoutest heart was going to quiver. Where to start? What do these lines mean? What if I screw up?? I decided to be practical: I would start by sharpening my pencils, making sure I had a good eraser (which I was pretty sure I would need), and then I went and did something else. 

Fortunately, a lot of things have changed since filing my first tax return more than…let’s just say more than 30 years ago. In a lot of ways, filing your taxes is easier than ever before. Here are some things to keep in mind as you plunge into tax season.

1. There is actually a method to the madness

No doubt about it: the tax code is voluminous, complex, and sometimes downright mind-numbing. There’s a reason that people taking the CPA exam for the first time have a lower pass rate than those taking the bar exam! But for most ordinary freelance musicians, those details don’t apply. What you need to know boils down to a few additional forms and an understanding of how the information flows between them. Think of your tax return like a big funnel, that starts with individual forms that eventually lead you to the main form that everyone fills out, the 1040. Each form concludes with a “bottom line” that is then transferred to the next form in the sequence, and so on until you get the ultimate bottom line on your 1040: Do you owe money or are you getting money back? Once you understand how these forms are related to each other you can see that there’s a pretty straightforward logic to how it’s all put together. 

2. Keeping good records is easier than ever

You may remember that phrase “garbage in, garbage out,” meaning that the most sophisticated computer program in the world is only as good as the data you put into it. If your data is flawed the outcome will be, too. Nowhere is this more true than with taxes. The good news is that keeping good records of your income and expenses is easy with today’s apps. Gone are the days of throwing physical receipts into a basket that gets dumped out onto the dining room table every year at tax time. Gone are the days of physically keeping a ledger with pencil and paper. The flip side of this is that you have no excuse not to keep good records. Good records not only satisfy the IRS, they also are valuable tools for detecting patterns in your spending habits and identifying potential cost savings and/or new income streams. And on the off chance you get audited (most people never are) you’ll have the information required to support your case that everything has been done properly and above board.

3. Plan ahead to avoid surprises

The first time I filled out a Schedule C (the main form that every freelance musician will need), I was stunned to discover that I owed the government money – quite a bit, as it turned out. Not only did I not have said money in my bank account, I also didn’t understand how such an outcome was possible in the first place. The culprit was an often-misunderstood aspect of taxes of freelancers: how we pay into Social Security and Medicare. Having to pay both my share and the employer’s share of these expenses was a curveball I hadn’t seen coming, and I wasn’t prepared. Other surprises can sometimes jump up to bite us at tax time, so it’s important that you set aside money throughout the year so you have what you need to meet your tax obligations when you file. If you make a sufficient amount, you might even be required to pay taxes quarterly. Either way, be sure to budget for taxes every time you’re calculating what you should ask for a gig, and, every time a check lands in your bank account. Spending everything you take in as soon as you make it is dangerous for the self-employed musician.

4. Tax apps can be useful, but be careful!

One thing that’s made filling out a tax return with pencil on paper obsolete is the advent of programs like TurboTax or QuickBooks. These apps are supposed to eliminate the guesswork and potential inaccuracies of doing your taxes on your own. And they do – to a point. Most Americans have a very simple tax return: they only have income from one employer and they don’t itemize their deductions. And for those folks, a tax app will work just fine. But with each successive complication in your return, the more and more we creep into “garbage in, garbage out” territory. Most tax professionals I’ve spoken with over the years do not advise relying solely on the tax program to tell you what to do. So if you do use one of these programs, be sure you know enough about how taxes work to make educated decisions on the data you enter and where you enter it. That knowledge can also help you review the return before it’s submitted. There are also free tax-filing websites that give you access to digital submission of your tax forms to the IRS while still giving you the freedom to customize your return as appropriate.

5. Know when to call in a Pro

I hope all of you reading this will reach a point where you need to hire a tax accountant to file your taxes. Why do I say that? Because it will mean that you’ve reached a point in your life and career where things are sufficiently complicated as to benefit from an expert. As you start to have a mix of 1099 and W2 income, as you purchase a home, as you have children or other dependents, as you start to invest your savings… each of these things makes your tax return that much more complicated to do. Eventually, paying an expert to prepare your return will more than pay for itself with the many nuances of the tax code that only an expert would know how to use. While the instructions on the tax form are clearer and simpler than ever, and while online forums and other sources are abundant (though be careful it’s a reliable source!), it’s important to know when you’re in over your head. And when you arrive there, winging it and hoping nobody notices is not a good strategy. Call in the experts.

If you’d like to learn more about filing your taxes as an independent musician, I hope you’ll join me and Young Concert Artists CPA Lisa Nuñez for Artist Taxes 101: Demystifying Taxes for the Independent Musician, a three-session workshop filled with information and tips for effectively handling your taxes. More information here!