Here are 12 pieces of advice from a CPA/business manager to help you manage the business side of your music career
It’s called the music business for a reason — yet for many indie artists, organizing and maintaining the business end of a music career can rank just above dental surgery when it comes to activities of choice.
It doesn’t have to be that way, says Errol Wander, a veteran CPA, business manager, and partner at Citrin Cooperman who works with artists like Gavin DeGraw and Dirty Projectors (and who also plays a mean guitar in his spare time). Following just a handful of straightforward suggestions will streamline your music business existence and help you avoid common financial pitfalls that can eat up precious hours and energy. The result? More time, creativity, and money to make your art the best it can be.
Here are some of Wander’s top tips, strategies, and philosophies to help you get on the right track:
Understand that better business leads to better music
“Having a career in music is an amazing thing,” says Wander, “but it’s not pre-ordained and it’s not a birthright. It’s hard work, but it can be done, and being responsible with your business will help you reach your goals.”
As much as you might not enjoy integrating things like diligent record-keeping into your daily musical existence, Wander affirms that any time invested to such ends will pay you back in dividends, and good business practices are equally important for major touring acts and indie up-and-comers alike.
“No matter what level you’re at, you’re going to be able to spend the most time on your art if you treat your art like a business,” he says. “I hope that’s not distasteful to hear, because it’s necessary. Otherwise, it’s a hobby. If music is a career you want, it needs to be treated like a career.”
File your taxes – always
Regardless of how much money you may have earned or lost in any given calendar year, you must file your taxes, says Wander. And even if you only earned enough from your music in 2013 to buy yourself a cup of coffee, failing to file at all can have unexpected consequences.
“I had one guy come in with six years of returns to file,” says Wander. “He thought it was going to be this big crisis and he was going to owe lots of money, but in fact, he had refunds owed to him.” The problem? After three years, your refunds go away, regardless of how much money may be owed to you. “Because he’d waited so long, he lost those first three years’ worth of refunds, which is money he really could have used. That was pretty awful to see.”
Wander also points out that many self-employed musicians, as opposed to people who work in salaried, forty-hour workweek jobs, need to pay estimated taxes four times a year. “Unless you’re on payroll from an artist, a school, a Broadway show, or something like that, taxes need to be paid quarterly to avoid penalties,” says Wander.
For an overview of estimated quarterly taxes, check out this article. Requirements can vary quite a bit from musician to musician, so Wander also recommends checking in with a music-friendly accountant or business manager to hone in on your own quarterly reporting needs.
Make it easy to look back
Wander recommends keeping consistent records of the money you spend and earn making music — both for your own records, and in case you ever get audited by the IRS.
“Keep a simple diary, either on your phone or laptop or in a journal, particularly of things like gratuities, expenditures where you don’t get a receipt, and even non-cash items as well,” says Wander. “It’s always helpful to be able to look back and say that on a certain day two months ago, you had lunch with these two people for this reason. In the case of an audit, if you’re asked why a certain bill is so big, you can point to your diary and say that you were taking out people from the label, or having a meeting with a new manager. With the IRS during an audit, the more details like that that you can give, the better.”
As far as paper receipts, Wander recommends holding on to any that might have a relationship to the business-side of your music. “Even if you’re saving them in a haphazard way, just tossing them in an envelope, which is pretty painless, at least you have them,” says Wander. “When looking at your business expenses during an audit, the IRS does want backup and is okay with credit card statements, but they may want more details — so yes, save your receipts, or at least scan them.”
Separate your finances
Especially early in your music career, it can be easy to pay for your groceries and guitar strings, Mother’s Day gifts and instrument cables, all from the same credit card or bank account. But when you start to get serious about the business side of your music, Wander advises, make sure to separate your professional finances from your personal ones.
“A good first step is to have separate bank accounts, so it’s easy for you to look back and see what you earned and spent on business, rather than having to go through, item by item,” says Wander.
Wander also recommends putting as many of your music business expenses on a dedicated business credit card as possible, especially when you’re on tour. “It’s much better than using a personal card,” he says. “It makes your bookkeeping so much easier, especially if you ever get audited. Also, make sure that you request a year-end statement or annual report from your card company, so you can have all of your expenses in the same place in front of you.”
Avoid IRS triggers
Whether you’re doing your own taxes or working with an accountant or business manager, be sure to avoid certain practices that will make you a target for an audit.
“One major no-no is clothes,” says Wander. “To someone who isn’t really looking into details, that seems unfair, because many musicians buy special outfits to wear onstage. But the IRS is very strict on this. To them, professional clothing is a nurse’s outfit or an industrial worker’s protective gear. If you just bought an outfit that you feel is outrageous, or even if you buy a $3,000 tuxedo to go to the Grammys, those aren’t tax deductions.”
Another area where indie musicians often end up in trouble is home office deductions. “The IRS has very specific guidelines about this,” says Wander. “You need to have a specific workspace in your home that qualifies, and then you take the square footage based on that workspace as compared to your whole home.” What if you write most of your music at your kitchen table? “Shared space doesn’t count,” says Wander. “I see people often make that mistake and claim sixty-percent of their apartments as home office on their taxes, and that’s no good.”
One final pitfall to be aware of: underpayment. “The IRS assumes a certain amount of money that you need to live and survive in a given city or area,” says Wander. “They have a list of what you roughly should be spending on rent, groceries, and other things, depending on where you live. If you’re not claiming enough income on your taxes to cover those amounts, they’re going to ask, where’d you get the money? Did you borrow it or spend it out of savings? Their suspicion in asking all of this is that you made money as cash and are not reporting it as income.”
Look into worker’s comp and other insurance
“There’s a common misunderstanding amongst a lot of artists when it comes to paying people who work for you,” says Wander. “A lot of people consider hired musicians to be independent contractors, but by definition, they’re really not. Even if they only work for you for a short period of time and don’t earn a lot of money, they’re employees.”
So what? If you have employees, Wander continues, you may be legally obligated to pay payroll taxes, unemployment insurance, and workers comp. “Workers comp is the worst by far,” says Wander, pointing out that problems generally occur when a musician you’ve hired files for unemployment benefits and lists you as a former employer — which can lead to the apparent conclusion that you’ve been employing people without paying for proper coverage. “We’ve seen notices up to forty or fifty thousand dollars delivered to artists who definitely can’t afford it,” Wander says.
Even if you’ve hired tons of musicians and this is the first you’ve ever thought about things like payroll taxes and workers comp, don’t worry. Laws can vary state to state and band situations can be vastly different from artist to artist — so make sure to check in with a qualified music lawyer, accountant, or business manager and find out what sort of coverage is best for your situation.
On the topic of coverage, Wander further recommends insuring your gear whenever you hit the road. “Bands can go to events like SXSW and, with so much going on, suddenly find out that their van and all of their equipment was stolen. Insuring your gear is important, and also making sure that everyone listed on your car insurance as an authorized driver is a good idea. If you’re driving for hours between gigs in the middle of nowhere, you may not think about it, but if something like an accident happens and the driver is not listed on your car insurance, you could have problems.”
Maintain (or resuscitate) your credit
Whether you’re heading out on tour or getting ready to purchase that handcrafted bass you’ve been dreaming of, having robust credit can be a big help in your music career.
“Credit is important for musicians to have, especially when you’re on the road, because there will be some things that you have to pay up front,” says Wander. “If you’re doing everything on a cash basis, things like booking hotel rooms, renting equipment, and car rentals can be hard or impossible.”
A lot of musicians suffer from lack of or bad credit, Wander says, but there are ways to repair it. “Some banks offer secure credit cards, which can help you in the right direction. It’s a really good thing to do.” (For some basics on secure credit cards, check out this article.)
Get help when you need it
Though it’s perfectly reasonable to do your taxes yourself using software packages like TurboTax, there may come a point in your career when you need help.
“When it’s financially feasible, I highly recommend getting a business manager, and not just an accountant to help you prepare your taxes,” says Wander. “A preparer who isn’t experienced in the music business may not think to ask about management or agent fees or how much you’ve spent on supplies like cables, batteries for your pedals, drum heads, or equipment repairs. You really benefit from working with someone experienced in the business.”
Hourly rates for such services can run high, so when is it right to make the jump and swallow the expense? “You need a business manager when you no longer have time to do everything yourself. When you need that very valuable time to write, practice, or do whatever it is that you do, having a business manager can take that worry off of your mind and free you to better practice your art.”
Stay on the books
At the end of a club date, the manager hands you a wad of twenties or, when everyone’s packing up to go home, your hired horn player asks to be paid in cash, rather than the check you’re trying to hand him. What do you do?
“Sometimes you’ll work with cash, but remember that it’s never okay to not declare income,” says Wander. “Income is always taxable, unless it’s a very specific case, like a municipal bond, where it’s stated otherwise.” In other words, if you are paid in cash, Wander advises noting the income in your diary and not just tucking it away with a wink and a nod. “With income, it’s always better to have a trail,” he says.
And if an employee of yours requests cash payment? “We hear this all the time,” says Wander. “Crew members, side musicians, they don’t want to declare the income because they don’t want to pay taxes on it, but as the artist, you need to be able to write off any money you pay as an expense.”
If you do end up paying someone in cash, Wander recommends having him or her sign a voucher, affirming that a cash payment of a given amount was made. And if someone pushes back, saying that her or she wants an under-the-table payment? “Your answer is, ‘I’m sorry, but I need to claim this as an expense on my taxes,’” Wander says.
Be patient and use common sense
No matter how wild your creativity and huge your musical ambitions, don’t forget that applying a healthy dose of down-to-earth sanity to your business activities now will lay the groundwork for any stratospheric successes that come your way. Just keep the long game in mind.
“Pay your bills and avoid debt by living within your means,” advises Wander. “You can dream big, but keep your feet planted on solid ground. Don’t spend money you haven’t made yet. That money will come, but things take time in this business. Success, or what we call success, will likely come before the money does.”
“Let’s preserve and nurture the beautiful career you’re building,” he continues. “This is all part of that.”
Disc Makers’ regular contributor Michael Gallant’s debut trio album Completely received a four-star review from DownBeat magazine and a five-star review from Critical Jazz, which stated: “This, my friends, is the future of jazz. Fresh, invigorating, progressive – there are simply not enough positive adjectives to list here.” Learn more, download now through iTunes, jam along with the new JamBandit app, or purchase through CD Baby. Follow him on Twitter at @Michael_Gallant or on Facebook.