One of the perks of being a musician is getting paid in cash, right? Well, let’s be honest that’s not the legal way to do it. Although you could get by with a cash only system, sooner or later (especially if you make enough money) the IRS will “knock on your door.” Many people talk like reporting your earnings as a musician to the government is as silly as reporting baby sitting cash. It isn’t silly though: if you are a professional musician who relies on freelance opportunities for your livelihood, conducting your business “over the table” is a way of protecting yourself. I’m not pro or anti-taxes…part of being a citizen in the US is paying taxes and receiving the benefits from them in return.
I currently have about 30 students and will reach my goal of teaching 60 students within a year. Now, reporting my income would have been silly when I had just 8 students in 2015. I actually did that year and owed the government a stupid amount of money for only making about $1,000 from the lessons. I have way more students than that now. The income I will be making the next tax year is not much by any means, but if I were to be audited it would be a huge issue.
Here’s an overview of how my accounts are set up to track my income and applicable tax deductions come tax time:
1. To DBA or not DBA.
Becoming a business under the government requires a few documents. A “Doing Business As” or DBA is a fictitious name under which you conduct your business. You can also apply to be an LLC and/or corporation. For my purposes I decided to not apply for a DBA – instead, I do all of my business under my own name. I decided that registering under a DBA could limit the business I conduct. I did not want my DBA to be “Alicia Piano Lessons” for example because I would be limited to only teaching piano. This becomes important when you claim business expenses and miles: I want to be able to claim anything related to any business I do under my name, even if it is pet sitting, accompanying, crocheting, teaching piano, teaching trombone, etc., etc… If I was selling a lot of items I would need to register under the state of Michigan for a sales tax license as well.
2. File for an EIN with the IRS.
The biggest expense (about $250) for me in setting up my business was filing for a Employment Identification Number or EIN. Usually individuals file taxes under their social security number. After receiving my EIN I can now pay my taxes and get paid from businesses as an independent contractor under that number.
3. Keep personal finances separate from your business finances.
With my EIN I opened up a business checking account. The biggest advice I found on the internet for free lancers and self-employed contractors is to keep all your personal finances separate. My bank was a little confused that I was opening the account under my own name and not a DBA but everything worked out fine (just because it is not common does not mean it is not possible). All the deposits for my piano lessons, accompanying, etc. go through this one account. The cheapest business account in my area is through FlagStar which has no fees and a low opening deposit (only $100). There is also no minimum balance, which is key since I am not making millions over here.
4. Set a date/time to transfer 25-30% of your income for taxes.
I set up a savings account at FlagStar as well where I transfer a percentage over for taxes. As a business I will be required to pay taxes quarterly. The worse situation you could be in is spending the money you owe the government so you are hurting for money come tax time. I have only done this for two months, but luckily I get paid about the same time each month. The private students that I teach from my home pay for lessons for the whole month at their first lesson of the month. The two music stores I work at pay me for the previous month at the beginning of the next month. I have direct deposit set up to my business checking for one of the stores. After I deposit all my checks at the ATM I let them clear and go online the next day to transfer the percentage. I then pay myself the remaining money in the checking account (leaving a little bit in the account for business expenses) with a check and deposit to my personal account with my phone.
5. Use PayPal or another system to track income with invoices.
I use PayPal Business to keep track of all my income, even the income from the two music stores that pay me as an independent contractor. I create invoices for each of the customers (the music stores I regard as a customer) and total up the lessons with the applicable rates. This helps me make sure I am actually getting paid for all the lessons I give because my time is valuable. Once I am paid I go in the PayPal app on my phone and mark the invoice as paid with the check number in the notes. I also attach the receipts from my ATM deposits to a printed version of these invoices in a file. My hope is that estimating my income will be super easy by running a report through PayPal come tax time. My home studio students have the option to pay through PayPal/Debit/Credit this way, but I don’t like that option because there is a processing fee that comes from the money I receive. I am able to send my students receipt of their payment through email, which makes the families feel better – hopefully that they are getting their money’s worth out of the lessons. I want them to know that I am committed to giving all the lessons they pay for and that the expense is well worth it. I remember my mom feeling uncomfortable paying my high school piano teacher because she was not sure if I was given all the lessons she paid for…also she thought it was shady when my piano teacher and hair dresser seemed to be avoiding taxes.
7. Be prepared to claim as much as possible.
As a self-employed person you are able to claim a lot of expenses that you could not otherwise. I use an app called Everlance that tracks all of my trips using the GPS on my phone. Every few days I open up the app and categorize the trip as business related or personal/medical. The app keeps track of the rates for medical and business trips and keeps a running total of the amount I can claim. Any trip where I conduct business qualifies. Since my home is my main place of business, round trips to the two music stores I work at qualify, as well as trips to schools or plays where I accompany. You can technically claim any trip where you even discuss business with a client. I am cautious though to not claim trips where I do personal stuff as well. I don’t claim my commute to school, for instance, or to campus just to practice piano. I also would not claim a round trip if I go to my boyfriend’s apartment, for example, before returning home. I use my business account to purchase items like file folders, pencils, prizes for my lesson incentives, my hosting/domain fee for the website, lesson books I will sell to my students later, etc. Those items can later be claimed – you could even buy a work computer and claim it – but only if they are through your business account and not personal account.
6. Get a marketing strategy.
I hate having to market myself but it is a necessary aspect of being self-employed. The key is to not spend a lot of time or money on it. I have this blog/website both for my personal enjoyment because I like to write, but also as a place to send interested clients. You do not even need to have a lot of information on your website: just a resume and contact info is great. Facebook marketing is usually really involved but is good for getting the word out. I use WordPress for my hosting, which is only a few bucks a month. I got my business cards through VistaPrint for only like 10 bucks. I was able to create my logo with a free trial of Adobe PhotoShop and my brochure through PowerPoint. I created simple flyers with my logo and a few bullet points about my background and gave them to my family members that work in the area. My dad and sister posted these flyers in their break rooms on the boards. Tons of people have been taking the little slips: my dad has a stack at work and replaces them every few weeks (and is excited to update me about their popularity). I probably have had about five people call me from seeing these flyers -which is really good considering they were only up at his work for a few weeks – and all of those five have begun lessons with me or joined one of my group classes.
Setting up business finances takes a little work but is well worth it!