In addition to having been a professional or semi-professional musician throughout my entire adult life, I’ve also served as a life insurance advisor and retirement planner for other musicians. Unfortunately, I have found that most musicians are not very savvy at financial planning.
The harsh reality is that being an artist does not exempt you from the economic realities of life. If you plan on growing old and being able to afford the basic necessities in your retirement, you, like everyone else, must make preparations.
Though this guide is no substitute for the services of a professional financial advisor who is personally in touch with your particular situation, it will at least give you an overview as to what you need to do, and put you in the correct mindset to investigate your options for the future.
There are a number of aspects of your financial situation you should investigate and educate yourself in regards to. Properly filing taxes and purchasing the correct forms of insurance is essential as a musician. Furthermore, if you have yet to start an emergency fund or a retirement fund, now is the time to start.
An emergency fund is a stash of cash or another asset you can quickly convert to cash to cover unexpected expenses. Such expenses might include car repairs, periods of job loss and unemployment, medical expenses, home repairs, or emergency instrument repairs or replacement.
The general rule of thumb is to get your insurance coverage updated, and then strive to have three to six months’ worth of expenses in the bank. Those of you who work seasonally may require more, especially if you rely on one or two venues for the vast majority of your income. Those with a substantial source of residual income may need less.
There are numerous places to store your emergency fund: a checking account, a money market account, a safe, or cash value in a permanent life insurance policy. Don’t rely on borrowing for this purpose – if you can’t work for a while, you will probably have a hard time borrowing money.
If you are a working professional musician (or plan to be), the first step is getting a handle on your books. You have to treat music as a business, and that means you must document your income.
- W-2 Income. If you’re on staff somewhere – say, as a member of a nightclub house band, as an instructor at a music school, or in an orchestra – your employer will issue you a W-2 tax form, which states your income tax, as well as anything withheld from your income, such as Social Security, Medicare, and state income taxes, if applicable.
- 1099 Income. In other instances, the venue or the people who hire you to perform will ask you to fill out a W-4. This means they will provide you with an IRS Form 1099 in January or February of the following year, detailing what they paid you. They will also send a form to the IRS so that they will know what they paid you. Unless your band or act has formed a corporation and your corporation pays you a salary, this is considered self-employment income – you have to declare it on your income taxes and pay taxes on it.
- Royalty Income. Do you have royalty income from the sales of albums, downloads, and merchandise? This, too, is considered taxable income. You’ll receive a Form 1040 Schedule E each year from the record company or downloading service documenting your income.
- Unreported Income. Sometimes you will not receive a W-4 or a 1099, as you may be paid in cash, or receive a percentage of ticket sale proceeds from your gig. While the IRS may never know about this money, it’s still self-employment income, and you’re legally required to declare it and pay taxes on it.
Since you’re in music as a business, you are entitled to deduct business expenses, so be sure to keep track of them all. You can reduce your taxable income by the amount you spend on legitimate business expenses. This includes lessons, sheet music, strings, union dues, cables, equipment and PA rental fees, hotel bills, meals eaten on the road, tax planning fees, and business legal expenses.
Keep a notebook, or use a good computer or mobile application to record everything. Save all of your receipts in a box or file, maintain a spreadsheet, and log the miles you drive in conjunction with your profession. You can deduct mileage on the vehicle you drive while touring – as well as the miles you accrue when traveling from your home office or other office to gigs – against your income at a rate of $0.555 per mile as of January 2012. This can be a significant deduction if you perform a lot.
If you’re a statutory employee and receive a W-2, you can deduct any of these expenses as non-reimbursed employee expenses by filing an IRS Form 2106 or 2106-EZ with your individual tax return (IRS Form 1040 – you can’t use a Form 1040EZ if you claim deductions). For those of you who are W-2 employees, you can only deduct these expenses to the extent they exceed 2% of your annual gross income.
If you are self-employed, however, the rules are a little different: You can deduct all your business expenses, down to the first dollar (however, meals and entertainment expenses that are not extravagant are always only 50% deductible). To claim them, file a Schedule C, Profit (or Loss) from Business, along with your Form 1040.
Self Employment Tax
In addition to paying income tax, you also have to fill out an IRS Form 1040 SE. This is where the IRS assesses your Social Security and Medicare taxes on everything over $400 of self-employment income. Remember, you are your own employer, unless your band is a corporation paying you a salary. So you have to also pay the employer’s portion of the Social Security Tax, and not just your own.
Failure to declare this income is a serious offense, and in egregious cases, could result in criminal prosecution for tax evasion.
The Performance Artists Tax Credit
Professional performance artists who are also W-2 employees have an important tax perk: While most W-2 employees can only itemize expenses over 2% of their annual income, musicians employed as statutory employees (as opposed to independent contractors who receive a 1099-MISC from the venue or producer) can deduct expenses right down to the first dollar, via the Performing Artist Tax Credit. To take the deduction, you must meet these criteria:
- During the tax year, you must have performed services in the performing arts as a statutory W-2 employee for at least two employers.
- You must receive at least $200 each from any two of these employers.
- Your related performing arts business expenses must be more than 10% of your gross income from the performance of those services.
- Your adjusted gross income cannot have been more than $16,000 before deducting these business expenses.
This credit may help part-time musicians, though the $16,000 cap on gross income tends to rule out most of the full-timers.
Here’s a good rule of thumb for people in any profession: Never make a bet you can’t afford to lose. There are all kinds of risks out there, and some of them are beyond the ability of many individuals to deal with financially. That’s where insurance comes in.
Insurance is the way we transfer risk from individuals who can’t afford to lose these bets to the financial markets, which can. You pay a small premium and the insurance company bears the risk, not you. While you can absorb a small monthly premium, you cannot absorb disability or someone stealing all your gear just before a big gig.
Health insurance is a common concern among professional musicians. Some states make it harder than others for individual artists to obtain health insurance, but unless you’re very wealthy, you need it. We’ve all known musicians who have become ill, and we pass the hat at a benefit concert. But those benefit concerts almost never come close to raising the money that is truly needed.
You have a few choices:
- Go Uninsured. This is simply a bad idea, unless you’re independently wealthy and can afford to write a check for $1 million or more out of your own pocket.
- Buy an Individual Policy. Buy a policy for yourself, or buy one for yourself and your family. You’re self-employed, so you don’t have an employer to split premiums with. However, if you’re in decent health, this should be affordable for hard-working musicians who frequently work.
- Get a Day Job. If you get a part-time job with health insurance benefits, you can enroll in the workplace insurance plan. This is an excellent solution for millions of people, and it will work just fine for you, unless you tour frequently or play a lot of day gigs.
- Form a Business. If you form a corporation or limited liability company with your band mates, you may be able to take advantage of your state’s group insurance rules. If all of you join the plan, and there are more than a certain number (often between two and four, though some states require insurers to issue policies on business groups of one), then you may be able to get a guaranteed issue policy. If one of you has health problems but the others are healthy, this may be workable, and may be the only way to get everyone in the band covered. It can be expensive, though – especially if one of you is sick and has a lot of medical expenses. State rules and pricing vary widely, so it’s best to sit down with a health insurance agent who can shop your applications out to several different companies.
- Join a Union. Some musicians’ unions have a basic union health care plan. In some cases, union membership (fully tax-deductible) is worth it for this benefit alone.
If you broke your arm and couldn’t play for six weeks, what would happen to your income? Disability income insurance kicks in if you can’t work due to illness or injury, and replaces a portion of your income (typically about 60%). This can be crucial in keeping food on your table and the lights on in your home. It may even be the difference between having a home and being homeless.
Unfortunately, individually underwritten disability insurance is notoriously difficult for musicians to obtain. To maximize your chances of being approved for coverage, carefully document your income. The insurance carrier will look at your tax returns, so be sure you declare your income, and show at least three years of income tax returns. The more income you declare, the better your disability coverage will be.
Car, Home, and Renters’ Insurance
If you depend on your gear to earn a living, and you can’t afford to immediately replace it if need be, you need renters insurance or homeowners insurance, as well as a good auto insurance policy. Why? In addition to covering the basics, such as collision and liability, auto insurance will cover you in case your gear is stolen out of your van. If you have a lot of gear, you may need to get extra coverage.
Document what you own, take photographs, and write down serial numbers. Having this information handy will be very helpful if you ever have to file a claim. You certainly don’t want to be out of work for a long time waiting for a check to buy new gear.
Also, be realistic when reporting the amount of miles you drive. You don’t want to have your auto insurance carrier contest your claim because you’ve been touring the country all year and you only told the auto insurance company you drive three miles back and forth to work every day.
Are there people who depend on you, or will depend on you, financially? If so, you owe it to them to purchase life insurance.
For young musicians, purchasing coverage for an amount 10 to 20 times your income is usually appropriate. You can roll back as you get older. In most cases, for those of you in your twenties or thirties, term life insurance is the way to go. If you’re in good health, you can get hundreds of thousands of dollars in coverage for the price of a pizza or two each month. Get a policy that’s guaranteed convertible to permanent insurance (whole life or universal life) and guaranteed renewable at the end of the term.
I usually recommend short terms of one to five years. In the future, you might want to convert some of it to higher premium policies that provide more lasting benefits.
Like nearly everyone, you will need to save for retirement. Few musicians can keep up a grueling performance schedule into their eighties, so it’s therefore crucial to save what you can. IRAs can also help you protect assets from creditors if you are ever sued or forced into bankruptcy.
A good starting point for retirement saving is a traditional IRA. You can deduct contributions to a traditional IRA, up to $5,000 per year ($6,000 if you’re over the age of 50) for 2012 if you meet income requirements which depend on your filing status. You don’t even have to itemize your deductions for IRA contributions – it’s an “above the line” adjustment to income, which means you can take the benefit and still claim the standard deduction if your expenses aren’t high enough to justify itemizing.
A Roth IRA can be a great tool for some: You don’t deduct contributions (musicians usually have plenty of other expenses to deduct), but any growth in a Roth IRA is tax-free, as long as you keep the account for five years and don’t withdraw your earnings until you’re at least 59 1/2. Contribution limits for a Roth are the same as they are for a traditional IRA, and your income must fall below a certain amount, depending on your filing status, to contribute to a Roth.
Have more to save? Consider a SEP IRA, a special retirement plan created for small business owners and self-employed entrepreneurs. A SEP IRA lets you put away up to 25% of your income, or $49,000 per year, whichever is less, under 2012 tax rules.
But don’t use any IRA as a piggy bank – you’ll get hit with a 10% penalty and have to pay income tax on everything you didn’t already pay taxes on until you’re 59 1/2.
Even if you are on staff as a house musician and receive a salary and a W-2, you should be on the lookout for self-employment opportunities and royalty income opportunities. Treat music as a business: Keep careful records, claim your income as any other professional would, file your taxes, and insure your gear and yourself. In the long run, you’ll receive Social Security and Medicare benefits, and protect yourself and your livelihood against the unexpected.
Like any other business owner, you can even create your own retirement or pension plan. But you also owe it to yourself to build a good team of professionals: an accountant, an attorney with a background in music and entertainment law (including intellectual property rights), a financial advisor or financial planner, and an insurance agent. Let them advise you on the business matters while you concentrate on the music. But don’t ever forget: When it comes to your personal finances and your music business, the ultimate responsibility lies with you.