Finance: Understanding Taxes
Tips For Success: How Taxes Work & How to Get The Most Out of Tax Season
According to Investopedia, “Taxes are mandatory contributions levied on individuals or corporations by a government entity—whether local, regional, or national.”
As creatives we spend our lives perfecting our craft and making a living doing what we love. While we work hard to improve our musical skills, it’s important to also improve our financial knowledge. Having tools to better understand taxes will help you get the most out of tax season.
What Are Taxes
While we might not enjoy paying them, taxes are an important part of our finances. Taxes help pay for other expenses in our country such as roads, public schools, and healthcare resources.
“Taxation not only pays for public goods and services; it is also a key ingredient in the social contract between citizens and the economy.”
It’s important to budget for taxes so you are prepared for any outcome when filing them. Taxes don’t have to be as complicated as they may seem, and having some tips on how they work can help you make the most out of this tax season.
Understanding how taxes work can help you navigate your financial health more effectively and increase the longevity of your money.
1.Deductibles
As musicians we have a variety of things we can deduct from our expenses to reduce our taxes. Depending on your career in the music industry, you may also be able to deduct other business and performance expenses.
Here are some common deductibles for musicians:
Recording studio fees
Utility costs for workspace
Business license fees
Fees for maintaining your website, email, social media, Zoom, etc.
Memberships for professional development
Travel expenses including meals, lodging, parking, tickets, etc.
When it comes to deducting instruments, music, and specific items for your instrument(s), these are items you pay for now and use for an extended period of time. This means you might be able to claim the cost of them in small amounts over time.
Be sure to keep all your receipts related to anything you do for your career. It’s important to be diligent in tracking your expenses so when it comes time for tax season you have records of everything.
2.Keep Track of Your Books & Deadlines
Keeping track of your deadlines and books is a crucial element when talking about taxes. If you don’t keep these things in order, you may find yourself scrambling when tax season comes- or worse, having to pay fees and penalties for waiting to pay.
Income taxes are usually paid as you earn your money, so each quarter you should be paying those taxes. If you wait til the end of the year you will face penalties which you don't want.
Avoid this unnecessary overpaying by paying your estimated taxes generously and on time. If you do end up overpaying you will receive money back at refund time during tax season.
It’s also important to keep track of everything you’re earning and spending throughout the year so you can make adjustments and minimize your taxes at the end of the year.
The Do’s & Don’t of Taxes- The Den Collective
3.Increase Your Emergency Savings & Retirement
I always remember my parents telling me to put a portion of each paycheck into my savings so I can save for my future. It’s important to make an effort to increase our savings so we have funds available for large expenses and emergencies.
Even if you are on a limited income, if you are able to take a small portion of your earnings and put them in your savings that will help you in the long run when you need it most.
If you receive a tax refund after tax season that can be a great way to jumpstart your savings or a retirement account.
We get so focused on the present that we often forget about our future. We need to start as early as we can to save for our retirement because you want to be sure you have enough to live off of when you are no longer working.
4.Always File Your Taxes
Whether you made under or over $400 a year, it’s important to always file your taxes once you’ve started working and after you retire.
Even if you don’t make enough money, filing your taxes could mean you might get a refund on taxes you’ve already paid and you might be able to average your income to reduce your taxes.
Filing your taxes also proves where you live, any asset you may own, and other things you may need to prove throughout your life.
Always filing keeps a legal record of your economic history and will help you when filing taxes in the future. Having these official records is also helpful for you to keep track of your income and expenses each year and manage where your money is going.
How Taxes Can Work With You
As musicians we often focus so much on our musical abilities that we forget about other important aspects of our career. Understanding how taxes work and how to make the most of tax season is an important part of improving our financial health.
Don’t forget to ask for help from a financial advisor if you need it. They are here to answer your questions, help you file your taxes, and really anything in between when it comes to your financial well-being.
The Den Collective partners with Finance Resource Nick Larry to provide financial resources and sessions for musicians. Nick is also hosting a finance series on March 16, 2022, so sign up here to learn more about money management! More information on our resources can be found here.
Ensuring you know how to make the most of tax season and how taxes work will help you sustain your career in the music industry. Myself and The Den Collective are here to support and help in any way we can!
Sources:
https://www.investopedia.com/terms/t/taxes.asp#toc-what-are-taxes
https://subnational.doingbusiness.org/en/data/exploretopics/paying-taxes/why-matters
https://aristake.com/musicians-tax-guide/
https://www.cnbc.com/2022/02/28/this-the-average-tax-refund-and-how-to-make-the-most-out-it.html
https://nmbx.newmusicusa.org/five-timely-tax-tips-for-musicians/