Tax Tips for American Musicians

March 1, 2021

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It is going to be quite a tax season this year. Many tax preparers (including me) since last March have gone virtual for their own safety as well as for the safety of their clients. With the technology
we have available to us now, documents can be securely uploaded to cloud portals, meetings can be done via Zoom, signature docs can be e-signed, and some preparers (again, including me) have phone apps their clients can use for all those tasks, to help make tax season run smoothly and efficiently.

As far as tax laws that affect musicians specifically, everything is pretty much the same as last year. However, there are a few new things to be aware of this year, as well as some COVID-related provisions that may be helpful to know about.

Since most people agree that reading about taxes is quite boring (well, this time that doesn’t include me), I will present this with sub-headings so you can find what applies to you and skip over what might not.

So, what is new, and what should you be aware of?

The New 1099-NEC

Have you noticed that the 1099s you received this year look different? The old 1099-MISC was replaced by the new 1099-NEC. This is now the required form to show payments to all independent contractors for services rendered. If you are sending 1099s to your musicians, use that form.

The change came about because too many payers were listing their fees to musicians in Box 3, “Other Income,” when they should have been in Box 7 “Non-Employee Compensation.” The new 1099-NEC has only one box, “Non-Employee Compensation,” which is where fees for services rendered should be reported by the payer to both the payee and the IRS.

Reporting Unemployment Compensation

Unfortunately—and I find this puzzling—unemployment compensation is taxable by the IRS, and of the 41 states that have an income tax, five of those states (California, New Jersey, Oregon, Pennsylvania, and Virginia) are the only ones that do not tax unemployment at the state level. Unemployment is reported to you on form 1099-G. Note that you will not get your 1099-G form in the mail. You will need to log into your online unemployment account and download your 1099-G form to prepare your taxes.

Stimulus Payments

Stimulus payments are not taxable, but you will need to know the exact amount that you received in order to reconcile it on your 2020 tax return. There is a new form on your 2020 taxes this year where you will reconcile your payment and be able to calculate whether you are due an extra or additional payment, or actually request a payment if you were eligible but never received one. Make it easy for your tax person: If you’re not sure how much you received, check your bank statement so an error is not made on your tax return.

PPP Forgiveable Loans for Self-Employed Musicians and Music Businesses

The second round of PPP loans is currently available to any self-employed individual or business having experienced at least a 25% drop in income from last year. These loans are available until March 31, but funds will probably run out way before then, so apply now at your bank if you qualify. There is a ton of info out there on how to apply and who qualifies.

PPP loans are not taxable even when forgiven, and you can deduct any expenses that you paid using forgiven PPP loan proceeds. Originally, the IRS’s position was that any expenses you paid using PPP proceeds were not deductible, but due to massive opposition they reversed course.

Charitable Contributions

Up to $300 of donations to a charitable organization can be deducted this year without itemizing, even if you take the standard deduction. This helps those who didn’t get any benefit last year from their donations because of the new tax law. Now, this is not automatic; you still have to have proof that you made the donations, same as always.

It is commonly misunderstood as to what donations are actually deductible. To be deductible, donations must be made to a registered tax exempt organization known as a 501(c)(3). Money or personal property donated to a needy individual is not tax deductible, and it is important to note that donations made to standard GoFundMecampaigns are also not deductible if the funds are given to an individual rather than to a registered charity. Last year was a big year for political donations, but, unfortunately, political donations are not tax deductible. If you are unsure as to whether an organization is a registered tax-exempt organization, you can use the IRS online tool to find out.

Interest on Your 2019 Tax Refund Is Taxable

Many taxpayers who received 2019 refunds in 2020 were paid interest by the IRS. Because the IRS was so backed up last year, many tax refunds went out late. As a result, the IRS was required to pay interest on these late refunds. Additionally, because the 2019 filing deadline was moved to July 15, many taxpayers who filed between April 15 and July 15 were paid interest on their refunds because those refunds were considered “issued late” by the IRS (after April 15). You will receive a form 1099-INT from the IRS which reports the taxable interest you must report as income.

2021 Filing Deadline is April 15

At the time of writing this article, the IRS has no intention of moving the filing due date this year, so assume it is still April 15 until further notice from them.

IRS Backlogs

In addition to being an extremely rough year for all of us, 2020 was a particularly rough year for the IRS. In addition to increased workload, staff reductions, having to get stimulus checks out, changes in tax code due to COVID-related provisions, etc., etc., the IRS had gotten way behind in their work. Many IRS offices rented trucks, which they parked outside their buildings, to store unopened mail until they could get around to opening it up. Their phone lines were nearly impossible to get through on, and anything having to do with mail was way behind, whether you were on the sending or receiving end. Bills were mistakenly mailed to people who had already paid their taxes months before, and if you were responding to an IRS notice, issues took a very long time to resolve.

Know that the IRS is still not back to normal. Phone lines are still tied up, correspondence issues are still taking a long time to resolve, and I’m sure there will be late refunds and IRS mistakes again this year. Of course, audits are still happening, but are being conducted by correspondence rather than in person.

The IRS is still in a backlog of unopened mail and asks that you expect any mail you send them to be opened within 60 days. My advice is to pay all IRS bills online at www.irs.gov/payments. If you’ve sent them a check a while back and it hasn’t cleared, they say to not cancel it; they will get to it eventually. They will apply your payment retroactively as of the postmarked date, not the date they finally got around to processing it.

And, if you plan on mailing your tax return in this year, I completely discourage it. Once they finally open it, they have to then review it, after which they have to process it and then issue your refund. Until things are back to normal this is going to take a very long time. All returns should be e-filed whenever possible, where they are on schedule to be processed within two to three weeks this year (normally 10 days to two weeks).

There You Have It!

Most importantly this year, make your tax appointment early and have all of your documents in order. Tax preparers are going to be under a lot of pressure this year, so be kind and do all you can to make it easier for them.

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Glenn Franke is a tax accountant and the owner of Musictax.com, based in New York City, which offers tax preparation and accounting services for musicians, entertainers, and production personnel. He is a trained musician who spent years performing on tour with major artists. Franke’s guest column is provided for informational purposes only, not as a substitute for advice from your personal tax professional.

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