The overwhelming majority of jazz musicians are freelance performers (and often freelance teachers, composers and other music-related service providers). But the informal aesthetics of the jazz world often extend to its business practices as well, with its handshake deals and cash payments. That makes it quite difficult to keep track of income and expenses when it comes time to report to the Internal Revenue Service.
It can be to musicians’ benefit to keep meticulous records. Businesses, including people who are self-employed businesses unto themselves, file their taxes differently, and are eligible for different tax benefits. For example, they may deduct business expenses before paying social security taxes, and this can include manager and publicist fees, sidemen payments, instrument purchases, rehearsal space rental and so forth. (Some musicians even set up separate companies — often a Limited Liability Company, or LLC — to take advantage of further intricacies in the tax code.)
It’s not just a matter of good accounting, though. The site JazzDIY has posted an interesting interview with Eileen Lippe, a tax preparer who specializes in working with musicians. The bottom line: Lippe says musicians have to “prove” to the IRS that they’re operating businesses, as opposed to playing music for fun:
Freelance musicians are considered sole proprietors or owners of a small business. But, unlike the typical small businesses, it may take them many years before they actually show a business profit. The IRS presumes that if you show a loss for more than two out of five years, that this is a hobby loss and not a true business loss and they may audit you. The burden of proof is on you, as the freelancer, to prove you are operating a business and not a hobby.
If you lose this challenge and are classified as a hobby, then you cannot deduct your losses and may not even be able to deduct your expenses altogether
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