Due to stronger compliance efforts by the IRS, companies are becoming more thorough about accounting for work performed by freelancers. People used to flying under Uncle Sam’s radar are now receiving 1099s at the end of the year. We see this happening in particular with musicians who may not have received 1099s in the past. “What do we do with them?” “Do I have to pay taxes on the money I earned from my gig?” Yes, just like everyone else, Uncle Sam wants a piece of your pie. But don’t fret too much; there are also ways of reducing the tax liability.

Freelancer earnings are typically reported in Box 7 of a 1099-MISC. The box specifically says “Nonemployee Compensation.” This income needs to be gathered with other 1099-MISCs that you may have received and reported on Schedule C of your personal income tax return. Schedule C is where you report Income from a Business. Schedule C also allows you to deduct expenses related to that income. Those expenses include, but are not limited to, cost of equipment (i.e. guitars, drums, amplifiers, etc.), cost of supplies (i.e. strings, sheet music, cords, etc.), costs of travel to/from the gig and rehearsals, costs of rehearsals, website costs, marketing costs, production costs and many more. In addition, if you have a dedicated office or studio in your home you can also deduct a portion of your rent or mortgage, as well as utilities.

If you have a band and share the income with others, you are required to issue a 1099-MISC to those that you share the income with (provided that you paid them more than $600 in the year). They, in turn, will need to file a Schedule C on their personal income taxes.

This is certainly not the most glamorous side of the music industry, but with the IRS cracking down on compliance, it’s going to be a standard cost of doing business. Lessen the pain by tracking your expenses and talking with your accountant about this…preferably well in advance of April 15th.