EPISODE 34
Tax Tips for the Working Musician with Farrell Parker
We are excited to deliver on our promise of providing some insight into the mysteries of taxes and we are uber excited to have our Guest Farrell Parker with us to demystify some of the most common tax questions we musicians have. Today we discuss everything from the biggest mistakes to how best to protect yourself.
0:00:01.8 S1: Welcome to the show that explores the methods and strategies on block and the financial side of your music business with over 40 years combined experience. Here are your host, Chris Webb and Dave tanking. Welcome to musicians, tiptree talk about positions and money, but we identify the three types of tax-savvy musicians, those who can count, and those who... I'm your host, Chris Webb, joined by my co-host and the man trying to raise his 27 dependents in an ethical world. Dave Damien. Thanks, crisper, having me back, I was gonna have all 27 join us, but I ran out of microphones. Today's quote is from Ben Franklin. In this world, nothing is certain except for death and taxes, we are excited to deliver on our promise of providing some insights into the mysteries of taxes, and we are uber excited to have our guest, feral Parker with us to demystify some of those most common questions. We have as musicians. Today, we discuss everything from the biggest mistakes to how best to protect yourself right after this... The number one accounting software for small businesses, QuickBooks can make multiple spreadsheets and mental math a thing in the past when it comes to managing your money.
0:01:18.1 S1: You can see it all, you can do it all in QuickBooks. With invoicing and QuickBooks, get paid online twice as fast, and paper and voicing, connect your bank and credit card accounts and quick book and get cash flow insights at a glance, deeper business insights for smarter decisions, view profit and loss or balance sheet reports instantly with a click of a button and simplify all your bookkeeping, go to musicians Tarot com deals to grab your free trial today or 50% off your first three months. Welcome back, everybody. This week's non-profit is from Washington DC. Women in Film and Video, I foment in Film and Video provides educational and networking opportunities for screen-based media makers, celebrates women's creative and technical achievements and media and advocates for a party, both in front of and behind the camera to ensure that all voices can be heard, a 50139-profit community benefit organisation founded in 1979. They are the premier professional resource for people who want successful media careers in the DC-Metro region, the resources, connections and advocacy support of vibrant creative media community. Learn more at www FDOT org and make sure you rate, subscribe to this podcast, leave us a comment, go to our website to check out all those resources and discounts that we have collected for you, and while you're there, sign up for a free weekly newsletter where we will connect you to other related articles and keep you up on the finance side of your music business.
0:02:48.2 S1: Feral Parker is the tax preparer, performing artist and recovering bartender based in the nation's capital. In overly, proud New Jersey native para studied Hospitality Management at Boston University, digital media skills at American University and classical acting at George Washington University. Currently running artist tax prep Pearl can be found making her way in voice-overs and stand-up comedy scenes and has been seen on stages all across the DC area, including the Arena Stage, the Kennedy Center and second city, with a particular focus on new musical theater work. Let's get into this helpful deep dive of tax insights for the working musician. Welcome to mitotic feral Parker. Hi, we're so glad to have you on. Thanks for coming. We appreciate the interview and cut. So we are so excited to finally get somebody to talk about taxes with us, honestly, because we have been talking to each other about how helpful it would be if we had an episode that kinda tackled a lot of... The most common questions that we get from our listeners and that we confront ourselves when trying to do our taxes... So this is super exciting for us. Yeah, I think that's the first time anyone has said, it's super exciting to talk about taxes.
0:04:13.1 S2: Every conversation with me about taxes is exciting to me. Yes.
0:04:20.1 S1: So before we get into the nitty-gritty of it all, I kinda wanna hear a little bit about how you got started down the path of doing taxes and becoming an expert of taxes.
0:04:31.1 S2: Yeah, so I like doing taxes. I found that I liked doing my taxes and that most people don't, so I figured, Oh, maybe I could do it for other people. And it's sort of that I was looking for something that I could do on my own and on my own schedule, I am a creative, but I have very much both the right brain and the left brain that wanna do something, and so I just felt there were so many artists specifically that taxes freak out. And since it was something that I didn't mind doing, that's where I started learning about it.
0:05:13.3 S1: And when was it one of those things where you just started offering to help your friend...
0:05:18.7 S2: No, I knew that I wanted to start it as a business, I was getting more work as an actor, and I just didn't have the flexibility that I wanted. I've been bar-tending for 10 years, and while that can be a good con, it's not flexible, you have to be there, and so I couldn't like book a last minute commercial, which is more lucrative ultimately. So I started training with the Volunteer Income Tax Assistance program, because they train you in return for your volunteer hours, so that's how I started, and then I started very small with just 10 clients in my first season.
0:06:01.6 S1: And that was how many years ago?
0:06:03.5 S2: That was at the end of 2018.
0:06:06.8 S1: Tell me a little bit about how you balance the two then I'm sure that there's a time of year where you just become overwhelmed with too many things being tax time.
0:06:15.2 S2: Yeah, I'm still figuring this out because a lot of this has been during the pandemic where there just aren't really... I'm mostly estate primarily a stay actor, and there haven't been a lot of opportunities to be on stage, I did one show last year and that was in the fall, so it didn't overlap with tax season, and when I was doing taxes and acting at the same time, I had a smaller number of clients, so it's really great that my business has grown a ton and that's great, it's something that people really need, but I still haven't encountered a real crossover issues, so that's to me. But otherwise, it is something that I can do from anywhere because I have a fully remote process and on my schedule, which is... I'm kind of a night. Anyway, I don't really prefer to operate on regular business hours, and it sort of feeds into the work and that it makes me more visible in my community, which I just don't think hurts...
0:07:17.7 S1: You said you were acting and doing taxes at the same time, do you... Bring those receipts out, I'm stage with you. Yes, during tech. Okay, just making... I relate to that in the sense of what we do here at Music, because we talk about money, and that seems like a very far end away from being a musician, but it is partly a way to become more visible too, because it's a conversation that really should be had with everybody about how they're managing the money, and so it does seem like just like your taxes help bring up conversations that need to be happening in the artist community, I feel like that's kind of what we experience here too, so I definitely relate to that.
0:08:03.3 S2: I think ideally, people wouldn't need me, I hope that my business becomes obsolete just because it shouldn't be so hard to figure out, so I hope that through things like you got your guys podcasts and other educational efforts that a thing where people don't need me, but for now, I'm happy to be doing it, and it doesn't suck for lots of reasons.
0:08:28.5 S1: I definitely know I could use someone with your expertise, so when you say that, it shouldn't be like the information should be more clear to do that... The idea of sitting down and doing my own taxes, I've always had someone help me with them, so for you to say that I look forward to learning more, it would be great to not be so afraid of it. Maybe we can use that as a little bit of transition. Because I think one of the reasons that it is such a daunting task is that we always feel like we're doing it wrong, no matter how much energy you put into doing your own taxes, you still feel like you might be missing something or doing something wrong, or... Always feel like you might get in trouble for something you're doing, and so maybe we could start with talking about some of the mistakes that you actually see musicians making or artists in general.
0:09:23.2 S2: People are not screwing up as much as they enter. I think that the IRS has instilled this fear in us that they're coming for us, and Dave, you said even audited... Yeah.
0:09:34.9 S1: Yep. Three years ago. Yeah, it had to do actually with the mistake, but the person who was prepping our taxes made a mistake and switched numbers around, but that caused to almost three-year audit.
0:09:51.4 S2: And that's pretty much the worst thing that can happen. Yet that's it, but that's it. Right, you're not going to jail unless you're actively committing fraud, then you just made a mistake and they might say, We want our money because you made a mistake, that's gonna cost you some money, but likely they aren't coming for you in any kind of active way, and likely, if you make a mistake, it is small and fixable.
0:10:23.0 S1: And it was resolved fairly quickly because my wife and and I are very organized, and some of the questions I'll be asking you just about being organized and tracking some of that information, it was a quick turn around because we could show everything we needed to, but even though we had all that information, it is nice to hear because you just get paid when you get that letter. And knowing what I know on the other side of it, I don't think I would have been that piniella.
0:10:51.4 S2: Lot of what I find when I first meet with people is that they are very afraid, and there also is a lot of shame around not knowing how to do your taxes or being behind on your taxes, I mean, the big thing is that people are not alone I know I work with a lot of people who are trying to play catch up, and I try to make that really affordable for people, but yeah, I feel like people have a lot of shame and fear around it, and I hope that this and other things that I do can help people to know that it's not that... It's okay. It's definitely gonna be... Okay, I started learning taxes from no information, and there are a lot of people that can help you, but I think it's... I don't know how to make it less scary to people just by telling them that they're not alone really, but I think the biggest mistake people make is not tracking their expenses, and that makes them money to the IRS that they don't necessarily need to pay if they're checking their expenses. So that's the number one, it's a mistake, not tracking your expenses as a self-employed artist.
0:11:53.4 S1: As somebody who receives all that information at the end of the year in a cluster of emails, I'm guessing, is there ways that you recommend people do that... Keep track of it, other apps that you recommend or systems that you use.
0:12:08.6 S2: So I don't recommend any apps... I know that there are people who use them. I have worked with people who've used QuickBooks Self-Employed, and it just miscarried things, it's not... You have to be knowledgeable in order to use those apps, I think they're not as user-friendly as they pretend to be, I have a spreadsheet that I use that's available for anyone to use on my website, it does not include receipt capture, but it is a spreadsheet that feeds directly into my process of preparing the taxes and includes income and expenses, as well as home office expense in mileage tracking, and you can use it from... What I do is I use the sheep staff on my phone, so that I can track everything as it's happening in real time, it's certainly not integrated with anything else, but it's a very simple way to do it, and it's free. And so that's what I use, and I work to create that for people, just because I think people have no idea where to start with bookkeeping or anything like that, so that's why
0:13:14.0 S1: Users... So you know, this episode is sponsored by QuickBooks.
0:13:20.1 S2: I thought it might be a knitting
0:13:25.1 S1: Because it's not... No, it's not.
0:13:28.1 S2: Because a lot of podcasts are... That's true.
0:13:32.7 S1: And we do use... We do have a commercial for them actually, that we use sometimes it's... Just different strokes for different folks. Yes, I 100% agree that those apps, they aren't that simple to use, you can easily try to let them go on autopilot and you end up doing just as much work fixing all of the mistakes or even more... Yeah, maybe even more, but yeah, sometimes categorize a dinner as being an airfare or something, and you just have no idea where it's getting that idea from, but it's not the smart as it's trying to be... Right, exactly. And free is always good. What do you recommend? When we were touring back in the before times, we would always calculate miles and then at first I would just be from leaving the home to the gig, and then from the gig either back home, but if you win anywhere else, you would kinda keep track of that and then people would start saying, Well, are you expecting gas? And we would say we would only do that if we rent to the car and it wasn't our own automobile that we're using, so when you work with other artists or musicians and they talk about travel, what's some advice you have for keeping records of that...
0:14:45.7 S2: Well, I think you're doing exactly right day...
0:14:48.8 S1: I think you fine.
0:14:50.1 S2: Yes. You can track your actual expenses for your personal car, but then you have to get into depreciation, and I just think, personally... For me, that's not worth it. I think the standard mileage rate, which is this year is 56% per mile, the IRS has decided on a number that includes things like your gas, your insurance, and repairs over the course of the year, even if you track your actual expenses, you still have to track your mileage, because the deduction is gonna be based on your percentage of miles driven just for business, if you have just one personal car. So, I personally recommend for simplicity, Tracking your mileage for your personal car, you can track tolls and parking are the only two other personal care expenses that are deductible outside of that standard mileage rate, and then yes, when you're driving a rental, you can take those actual expenses so
0:15:51.2 S1: I can't charge the slush, is you're saying... And keep track of those is a writeup on my long drives.
0:15:59.2 S2: Are you talking about 7-11 uses? Yeah, well, that's a really good question. No. Convenience Store and grocery groceries, the IRS doesn't want you to deduct... One of the rules that they changed is that you can deduct take-out meals, and that's in order that we can support as small business owners, restaurants during this time, but you can't deduct those groceries or convenience store items, but yeah, this year and through next year, through this calendar year, you can deduct take out meals as well as your restaurant meals for business.
0:16:39.3 S1: What about other deductions? Like home, for our homes, we all usually have a dedicated space that we record to work in, and what kind of things for our house are typical for... Good write-off options.
0:16:53.5 S2: Yeah, well, I don't know how much you guys talk about write-offs and what they are... Do a little bit of that.
0:16:59.9 S1: We don't talk, we don't... Again about it.
0:17:02.2 S2: I just wanna clarify the language that we're using, 'cause a lot of people, we talk about deductions, and a lot of people think that itemized deductions and business expenses are the same thing, and they're not... So everyone takes, unless they itemized deductions, the standard deduction, and that's the amount of wage and salary income that the government has decided doesn't need to be a tax, so that's 120550 for individuals this year, it's more if you're filing status, is married filing jointly or had a household, people who itemize their deductions are usually in a higher income bracket because they need to be able to deduct more than that 12550 in taxes, mortgage interest, out-of-pocket medical expenses and charitable donations. In addition to that, if you have 1099 or self-employment, you can deduct business expenses from that as well, so you have that standard deduction or potentially the itemized deduction, most artists that I know at a certain level are taking the standard deduction, unless you own a home, so I will typically call those business deductions business expenses just to differentiate between itemized deduction and business expenses, and that is one of the benefits that we get as self-employed people because most people can't take employee expenses.
0:18:24.4 S1: So is it still true that you can deduct part of your Internet, part of your cell phone, part of your other home expenses, even if you are taking the standard deduction or does that fall...
0:18:37.7 S2: So back to home office, if you have a schedule C for self-employment income, you can take a home off as expense, the role for home office is that the space be used regularly and exclusively for your business activity, so that's like Dave, if you got audited, you would wanna be able to show them that you're not storing your groceries in the same closet that you store their sound equipment, if you wanna deduct that, it doesn't have to be an entire room, so that's another thing if you have a desk in your room or if you have a small sound booth that's part of another room, those can be deducted. There's something called the standard deduction for home office, which is... It's really only, I think, 5 per square foot. So it is often worthwhile to do those actual expenses, and that will include utilities, it will include rent, if you pay rent, it will include mortgage interest, if you are paying a mortgage, taxes, HOA fees, any of those things, so that's a whole separate form that if you're doing your own taxes by hand can be a little tricky to figure out, but can be a significant deduction.
0:19:50.2 S1: So say somebody buys a bunch of new equipment, I've seen on there sometimes that you can take it all at once, or you can divide that as a deduction for your business, over course of yours, is there any reason to do one versus the other...
0:20:03.9 S2: No personal preference, if you were a large business, there are more particular rules about that, but all of us are small business owners because we're taking in probably less than millions, and that's what's considered a small business, so it really depends on the size of the item. And for me, I mostly take expenses in the year that I incur them, and you can do that and you can depreciate them, so if you're someone who bought, like you said, a bunch of equipment, a bunch of expensive equipment or a grand piano, and you're probably paying it off over time anyway, it might be worthwhile to spread that over the life of the depreciate item.
0:20:44.0 S1: You just made a comment like, What defines a small business? So let's also define what's a hobby, because that was also something that was discussed during that time, if you had X amount of years that you made so much money, or if you were in the negative... And I think reading up on that at the time, it was obvious where musicians could say, This is my business, this is what I do for a living, these are things that I can write off, or you're investing in a happy... That you just love to do.
0:21:15.8 S2: Yes, so there's not a rule in that you are a law, but it's a guideline, so the guideline is that the IRS wants to see that you made a profit in three out of five years, you can absolutely take a loss on your business. There's nothing wrong with taking a loss on your business, large corporations take losses on their business all the time, we just feel scared to do it because we're individuals and we're afraid of the IRS. So that's the guideline. And what could happen if you take a loss in more five years is the arrest could send you a letter saying, Hey, we wanna re-classify your business as a hobby, if they did that, you could still say, no. It's a business, and what you would need to show them in that case is that you have been making changes every year in order to try and generate a profit, and so a really good thing to do, just... I think for all of us running self-employment individual businesses is you don't have to have an official business plan, but sitting down at the end of the year or the beginning of the year, and just typing a little bit out about what worked money-wise for you how much money you made, how much money you spent, how you can monetize your artist business that are in the next year is gonna be something that could prevent that reclassification from happening.
0:22:40.8 S2: I don't think that's something that happens very often. But that's my suggestion for kind of avoiding that is having something written, it doesn't have to be an official business plan, but that's showing alongside your bookkeeping that you're serious as a business because the IRS has given you the benefit of deducting those expenses as well as things like the qualified business income adjustment, which is another deduction that you can get if you have a profit.
0:23:06.6 S1: Feels like a great idea, regardless of taxes at the end of year to sit down and look at your expenses and profit, see what you can do to adjust, which is the case they can go to musicians HipChat and grab that free tool that we offer Dave, 'cause that... What you're getting at with that one? You know what, I wish I was, but I'm just choosing my words wisely with her also... Something doesn't come back at me. One step ahead of me. So I had a job there, but then he brought it back. He brought it back, Christ, you could also use that tool at musicians to
0:23:41.2 S2: Jar... You're not gonna tell me what it is.
0:23:45.7 S1: It's a forecasting tool that you can use to do what you just said, it helps you chart how you did last year in categories of your different types of income streams, and then forecast how they're gonna do the following year, and even as a little secreting goals on on that, so... Awesome. Yeah. We hope you enjoyed part one there with para. We definitely had a lot of questions that we were trying to cram in as quickly as possible, don't try to cram in joke, slow with her, 'cause she'll call you out and just glaze over them because she didn't find them funny, but later... We had a great conversation about how she can help me because she is a comedian, so I have some work to do, Chris. Well, we definitely identified a lot of the big that she sees as well as ways to tackle keeping track of your touring and your vehicle and your expenses that you take from a random aspects of your business, and as those add up and being organized about it is very important, because out of the gate, you can show that this is your business, and although most people and think, Oh, you're a musician, so what do you do in real life? Or is this your hobby, this isn't a hobby, and you mark that by taking the seriously and having accounting organized for your business, definitely, and talking about what it is that identifies you as a business or a hobby, it's really good stuff to know all these things, knowing if you're gonna be taking all those write-offs versus standard deductions, and what the difference is between those two types of tax savings...
0:25:33.5 S1: Yep, that's probably one that's worth listening to again, so if you miss anything, you can remind about 20 minutes and just go through that again 'cause it might be worth it as we get close to tax time right now, I think we have some pretty interesting. Does and donuts, I know you have one, definitely that we don't wanna do, and that's Don't take our word for, is everything listed here, of course, we're not legal experts or tax advisors, so feral is a trusted resource and reach out to her if you have any questions but you should definitely discuss these issues with your professional tax advisor and do make some effort out of all this... Do you make some sort of change in the way that you are doing the process? One thing towards getting better at being prepared, so our one action step for the week, review your approach to keeping track of your expenses and income and ask one respected colleague about their system for these critical business management skills. So let me show you how this is done. Hey, Dave, how do you keep... Of your expenses and income. Well, I was schooled very quickly, Chris, I've had the pleasure of being audit and it was due to a filing air by our...
0:26:50.8 S1: Definitely our old tax account and got a new one right away, but the one thing that made the process goes so smoothly is that myself and Anne had organized records for everything, so just as a musician with traveling, I had records especially... This was back in 2017, 2018, when I was touring, I had addresses from where I started driving to when I got to the gig, what were those addresses, the dates and how many miles that took... Food, everything on a receipt, I would write who I was with what we discussed, I took a picture of it, put it in the QuickBooks business for your square footage of the house, they asked this question like, is there a bedroom in your office? Because then it's really not an office, so having all of that listed really help that this is my main office, and it's actually the same square footage of our old house, so I didn't have to change anything there, which meant a lot easier sales receipts. So she wanted to see everything from merch sales to song sales, what inventory came out when they were not... When they were sold, when they came in, and she made it not so scary, which is something that I also like that far...
0:28:01.2 S1: Also, they're there to do their job, and if you do your job and keep track of everything, something like this won't be so crazy, but one lesson I did learn was with W-9s, I only ask for them if I pay someone 600 or more. And during the audit, you need to prove that if you gave someone 400 and it's a write-off, you don't need their W-9, but if you get audited, you need to show that that person really exists, which again, I never even thought of... So I had to go back to every single person that I worked with in 2018. And this was a year later, and say, I need your W-9. So now, before I made anybody, I ask for 9 out of the gates, and if I keep it in my records if I need it, if I pay them less than 600 or be able to write him a 1099, if I go over 600... Another thing that I kept really good track of Was gear education and marketing, education never stops, and every book you read, every online class, you take anything that you spend money on to improve your future as something that is right off.
0:29:09.0 S1: So I make sure to confer everything that improves my business, lessons learned on lying in the studio books, marketing, advertising spend, every little thing adds up, and the point is not to look for every item that is a write-off, but to look for every dollar you spend to increase your business's gross profit in the future, because as your business grows, your expenses will grow to... So I think if you stay organized monthly, you'll be ahead of the curve when it comes to filing quarterly, and if you get an... Otherwise, it's not fun. Yeah, that's rough. That is rough and... Yeah, and luckily that that percentage of people that actually receive an audit is so small... What is it? 2% or something, or less than 2% of the population per year. Yeah, and it was just... They wrote in a different number for and myself, they switched our numbers on each page, so that was a huge red flag, so it wasn't like we were doing anything wrong, but you still have to show everything, and that just shows that any little mistake could trigger something like that, it wouldn't have anything to do with misrepresenting yourself, but to be prepared if that happened, and so a long answer to you use QuickBooks is there in...
0:30:23.5 S1: You just said that, I am sorry you went through all the... Well, we know your time here is valuable, and we appreciate you spending this time with us and being a part of this community, it is our hope that you find the sense of community here at musician Zipcar and that you will help us spread the word to make you stronger, if you wanna get a hold of us, Dave's got a couple of ways for that to happen. Yeah, can connect with us on musicians, Tihar dot com, musicians to Aramaic, also give us a ring at 970-680-1323 lava, comment or a question, and we might play it on the podcast, we're always looking for new things to talk about and... Don't talk to long 'cause Chris has already cut me off from the last thing, and I should have just said footwork, but no, you know I kept talking just like I am now, so you know what? Just keep talking, just believe as much information on the message as you can and wire added, check out artist tax prep dot com, and Farrar dot com. Believe all her socials up on the show notes as well.
0:31:26.8 S1: And as always, thank you for joining us and remember there is already enough for everyone, you just need to know how to get it, until next time on behalf of Dave tanking and myself. Crewe, please stay safe. Stay healthy to take care of each other. Remember, you must pay taxes, but there's no law that says You've gotta leave tip, this is a musician step done. Nothing on this show should be considered a specific personal or professional advice, please themselves, an appropriate tax, legal business or financial professional or individualized device in division results in a crate and oldest castrated IES have a potential property loss, the operating on the home of musicians tip jar leeso.