Tax Basics for Independent Artists

This is the first in a guest blog series by Jonathan Cain, Chartered Financial Consult(R), cellist, engineer, and (if I may add) husband extraordinaire! The goal of this series is to provide basic information on taxes for independent artists, such as performers, dance teachers, and choreographers, to answer some common questions about income, expenses, and related issues. 

Tax Basics For Independent artists-2

Chances are if you’re in the fine or performing arts, you may be an Independent Artist for tax purposes. Dancers, dance teachers, musicians, composers, writers, bloggers, choreographers, actors, directors, painters, sculptors — all can be Independent Artists. Focusing primarily on performing artists, the tax basics presented through this series are generally extensible to all Independent Artists. In this post we focus on the difference between employee income and self-employment income.

Employment Type:

  • An Employee is someone that signs a W-4 form prior to work, so that their employer can withhold tax from the income the employee receive from that employer.
  • An Independent Artist is not an employee, and receives $400.00 or more income in income with a given calendar year for any artist-related work, that is any goods sold or services performed for which the artist receives income. This income is called self-employment income.

Independent Artists are a category recognized by the Internal Revenue Service (IRS); they are considered Independent Contractors that are Self-Employed. Let’s consider some examples. 

Example 1: Martha is a dance artist with the following income for the year: 

  • $200.00 — Performance cycle with Viva Ballet in March. Income in the form of a check, no tax forms signed.
  • $200.00 — Guest teaching at a summer intensive at Joe’s Dance Factory in June. Income in the form of cash, no tax forms signed. 
  • $504/month for teaching three classes a week at Dance Studio A during the non-summer months. Her hourly rate is $30. Dance Studio A had Martha sign a W-4 before she started working.

For tax purposes, Martha is an Independent Artist, because she received $400.00 total from Viva Ballet and Joe’s Dance Factory, where she did not sign a W-4. Martha is also an employee, because she did sign a W-4 at Dance Studio A. If she worked for 9 months at Dance Studio A, then her take home pay was $4,536.00 (9 months at $504.00 per month). So at the end of the year, she has $4,536.00 in employee income, and separately $400.00 in self-employment income. Her total take-home income was $4,936.00

Example 2: George is also a dance artist with the following income for the year:

  • $200.00 — Performance cycle with Viva Ballet in March. Income in the form of a check, no tax forms signed.
  • $200.00 — Guest teaching at a summer intensive at Joe’s Dance Factory in June. Income in the form of cash, no tax forms signed. 
  • $600/month for teaching three classes a week at Dance Studio B during the non-summer months. His hourly rate is $30. Dance Studio B had George sign a W-9 before he started working.

Just like Martha, George is an Independent Artist. Unlike Martha, he is not an employee at Dance Studio B, because he did not sign a W-4. Instead he signed a W-9, which means that all his income from Dance Studio B is self-employment income. So, George’s total self-employment income for the year is $5,800.00.

At the end of the year, George took home more money than Martha, even though they both taught three classes a week for $30 an hour. In fact, each class was the same length and they both worked the same number of hours per week! They both should be making $600/month. So what gives? Why does George get more money than Martha?

It boils down to the difference in employee income and self-employment income. Although counter-intuitive, we shall find that Martha has actually fared better than George due the types of taxes that are applied. 

Tax Types (with fictitious percentages):

  • Local/State Income Tax, 5%.
  • Federal Income Tax, 10%
  • Social Security Tax, 15%
  • Medicare Tax, 7%

Local and State taxes vary greatly across the USA, so let us only focus one the latter three. When Martha signed her W-4, Dance Studio A agreed to pay half the Federal Income, Social Security, and Medicare Taxes. Dance Studio A also agreed to withhold Martha’s portion (the other half) from her check. So her total tax breakdown is as follows:

Description Calculation Total
Total Monthly Income $600
Federal Income Tax (10%) $600 * .1 -$60
Social Security Tax (15%) $600 * .15 -$90
Medicare Tax (7%) $600 * .07 -$42
Total Tax -$192
Martha’s ½ Share of Taxes $192 / 2 -$96
Martha’s Monthly Take-home Pay $600 – $96 $504

Because Dance Studio A pays half of Martha’s taxes, they are essentially paying her $696 per month (Martha’s rate plus half the tax, $600 + $96). Dance Studio B, on the other hand, pays George a total $600, with no consideration to George’s taxes.

Since he is an Independent Artist receiving self-employment income, he is expected to pay both the employee’s share and the employer’s share of taxes since he is receiving self-employment income. This is the source of the “double tax” that self-employed individuals pay: One for themselves, and once as an employer of themselves. Let’s look at George’s breakdown:

Description Calculation Total
Total Monthly Income $600
Federal Income Tax (10%) $600 * .1  -$60
Social Security Tax (15%) $600 * .15 -$90
Medicare Tax (7%) $600 * .07 -$42
George’s Monthly Share of Taxes -$192
George’s Income after Tax $600 – $192 $408

Come tax time the following April, George is expected to pay his tax bill, which for his income received from Dance Studio B is a total of $1728 (9 months times $192/month). Martha’s bill, which she doesn’t see because Dance Studio A withholds her portion of the tax, is half this at $864. So, because Martha is an employee at Dance Studio A and not self-employed, she has an additional $864 at the end of the year from Dance Studio A. This amounts to the additional money that Dance Studio A paid the IRS on her behalf as her employer. 

When considering only income, it is more advantageous to be an employee, rather than self-employed. For us self-employed Independent Artists, it is recommended that each month we stash away the money we will owe for taxes in a high-yield money market account, where we can receive some interest on the savings before tax time. More importantly, saving this money on a monthly basis helps us cope with the sticker shock of a $1728 bill come April. However, if we expect to owe the IRS more than $1000 in taxes for the year (as of 2019), we are required to estimate our taxes and pay the IRS quarterly installments. 

Tax Forms:

  • W-4: A form signed by an employee indicating that the employer will pay half the employee’s tax, and withhold the other half. All taxes are sent to the IRS by the employer.
  • W-2:  A form that the employer sends to the IRS, the state, and the employee in January of the following year, indicating the amount of tax sent to the IRS on the employee’s behalf.
  • W-9: A form an Independent Artist (contractor) signs with a contractee indicating that the contractor is responsible for all of the income tax.
  • 1099-MISC: If the contractor is paid more than $600 in a year, the contractee is required to file this form with the IRS, sending a copy to the contractor in January.
  • 1040-ES: A form an Independent Artist files quarterly that pays the IRS estimated self-employment taxes. 

The next post in this series addresses self-employment expenses, which as we shall see is a way to reduce the tax burden of Independent Artists.

About the Guest Author:

Jonathan Cain is a Chartered Financial Consultant(R) and cellist with over a decade of experience as an Independent Artist. He met his wife Shannon Dooling-Cain in graduate school while performing Piazzolla Tangos in Virginia.

 

 

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