How to Avoid the Most Costly Mistake Made by Most Musicians, Entertainers, Artists, and Authors (Must-Read for All Sole Proprietors and Entrepreneurs)
“Some people have all the luck”, as they say. They grow up with at least one if not two parents (or perhaps an uncle, aunt, grandparent, or other adult role model) that knows a thing or two about running what I would call “a legitimate business”, as in, one that not only turns a profit but also pays its taxes, as opposed to one that survives by doing “under the table”-type deals, typically involving cash and which leave little to no paper trail for Uncle Sam/the I.R.S. to follow.
Unfortunately for me, I wasn’t one of the so-called “lucky ones”. Like most kids in the 80’s and early 90’s, I rarely ever saw my father, as he worked full-time at the same paper mill he’d been “gainfully employed” at since he was 18 years old five days a week, and my mother was a stay-at-home mom who had little to no skill outside of parenting (which, in her defense, does require a lot of skill, if it’s done right). Needless to say, my parents were not what I would call “extremely entrepreneurial”, and in that regard, they were nothing like me, as evidenced by a comment my father made to me a year or two ago, whereby he jokingly admitted that he didn’t know whose kid I was (on account of my creativity and entrepreneurial accomplishments).
TALENT MAY RUN IN THE FAMILY…BUT GOOD BUSINESS SENSE? NOT NECESSARILY
Sure, my mother was quite skilled at sewing, but she never made a career out of it (or even tried to). And while my father did play polka music gigs at local bars on the weekends, as well as dabble in a fairly-stable side-gig that involved installing water wells, pumps, and irrigation systems (i.e.: sprinklers), he never quite crossed over into what I would call “legitimate business” territory and, not surprisingly, took most, if not all, of his side-gig payments in cash.
If I had known then what I know now, I would have known that my father was the same thing I would become became straight out of college: A “sole proprietor”, otherwise known a person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses. Unfortunately, in my house growing up, there was no talk of anything “sole proprietorship”, “entrepreneurial”, or “owning a business”-related, save for my father’s occasional requests for me to help him with an irrigation-related job that he couldn’t do himself, and there was absolutely no discussion of anything tax-related. As a matter of fact, if you had asked me, as a kid, if I even knew what taxes were, let alone that people like my father owed them on any employment-related income, all you’d have gotten out of me was a funny look.
To be honest with you, I’m not even sure that my father paid income tax on his side-gig-related earnings, let alone the lesser-known (yet equally owed) self-employment (or SE) tax that most of you reading this probably know nothing about and which all sole proprietors owe on their self-employment-related income on a quarterly basis, for the sake of covering the portion of their Medicare and Social Security-related taxes that an employer usually covers in a “traditional”, 9-to-5-style employment situation. This is not to say that my father didn’t pay his taxes or that he is guilty of tax evasion in any way, shape, or form, because I honestly have no evidence of any such thing, but it is to say that it is highly unlikely that my father, being the simple, salt-of-the-earth man that I know him to be, knew enough about running his own business, or about business in general, to even know where to start when it came to things like taxes.
THE MOST EXPENSIVE MISTAKE AN ENTREPRENEUR COULD POSSIBLY MAKE
For the sake of supporting this blog’s premise, let’s assume, for a moment, that my father didn’t pay any income or SE tax on his self-employment-related earnings. While this would have been a very big mistake in its own right for any entrepreneur to have made, and one which could have, had my father been caught making it, cost my father thousands of dollars in unpaid taxes and interest, not to mention time in jail, it would not have been the costliest mistake that an entrepreneur can make, in my opinion and based on my experience.
“So…if that’s not the costliest mistake an entrepreneur could make, then what is?” you’re surely wondering. Listen up, my fellow musicians, entertainers, artists, and authors:
It’s not taking the business-expense-related deductions that every sole proprietor is entitled to take on his or her taxes (Schedule C in the United States, to be exact) and which (if they’re taken) serve to reduce the amount of overall tax that he or she owes on his or her self-employment-related earnings (both in terms of income tax and SE tax).
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I’m talking about deductions for routine, business-related expenses such as:
- A percentage of your phone and/or Internet bills
- Meals and hotel stays/lodging (so long as it’s business-related)
- Mileage on your vehicle/the cost of gas, related to whatever driving you do for your business
- Office supplies (such as pens, paper, ink, binders, etc.)
- Office furniture or furnishings for your home office (such as a desk, chairs, bookshelves, artwork, etc.)
- An amount relative to a calculation based on the actual square footage of your home office, not only with regards to the office space itself, but also with regards to the percentage of your utility bills specific to the space
- Software (think an anti-virus program for your work computer, for example) and hardware (including a new work computer itself, new printer/scanner, etc.), which can be deducted all at once in some cases or, more typically, depreciated over the course of a couple years
- Education related to your field, including business-related seminars, books, online and in-person courses or training, etc.
- Business cards, advertising, attorney fees (for legal assistance related to your business), a portion of your tax professional’s fees specific to your business, etc.
And the list goes on and on and on. Honestly, I could write an entire blog post just on the things you, as a sole proprietor, could legitimately claim as deductions on your taxes—and I may very well do just that, in the very near future—but for me to do so here would be for me to go far above and beyond the scope of this post. Suffice it to say, we can talk more about that later. For now, I just want to be clear that I am not a tax professional, nor am I a lawyer, and so this post does not constitute, in any way, shape, or form, legal advice, but rather my simple attempt to assist you in avoiding making the same extremely costly mistake I’ve made in the past, with regards to not doing what I could have (and should have) done to reduce my tax burden and to therefore free up more cash for growing my businesses.
THERE CAN BE NO REDUCTION WITHOUT A DEDUCTION (LESSON LEARNED)
The mistake I’m referring to, specifically, is a major blunder I made circa 2005-2007 when I was attempting to get my own, independent music label (BattleScar Records) off the ground. Back then, I’d purchased several thousand dollars worth of musical equipment, including a very expensive microphone for my home studio, music production software for my computer, a top-of-the-line Roland X6 keyboard/workstation, amps, mixers, speakers, a CD turntable, more cords and adapters than I can count, a set of wireless microphones for live performances, a website, a big, vinyl promotional banner, thousands of physical CD’s for giveaways, etc.—none of which I claimed as tax write-offs and all of which I could have, in addition to all of the mileage I put on my vehicle driving to and from my live performances.
Because of this blunder, which was largely the result of me having had no one who was knowledgeable about taxes to talk to growing up, I ended up paying far more in taxes between 2006 and 2008 than I should have. Little did I know back then (and, in fact, until my early 30’s, the start of which was only about four years ago) that while business entities such as S-Corps and Corporations are not legally allowed to mingle personal and business-related funds, sole proprietors are legally allowed to mingle the same—in other words, to fund their business expenses with their personal funds and their personal expenses with their business funds—thus enabling them to essentially write off (or deduct) a portion of their personal funds that they’d otherwise have owed taxes on, which has the net effect of reducing the amount of overall tax they owe, regardless of whether they file their taxes as an individual or as a married couple filing jointly, and freeing up a ton of cash for further investment in their business and/or personal life. Oh, how I wish I’d known this at 18.
Now, at first blush, what I just described might sound downright shady or even illegal to you, but even without me being a tax professional or a lawyer, I can assure you that it’s not. Not only is it not shady/illegal, but it’s encouraged by the government (at least in the United States anyway), with the government’s intent being to empower success-oriented individuals like you and me to succeed so that we can pay even more taxes to them (a win-win situation for them, if ever there was one).
In conclusion, the bottom line is this: If you’re not keeping proper track of all your business-related expenses, saving all your business-related receipts, keeping detailed records of how many miles you drive for your business, and taking every business-expense-related deduction you can on your taxes every year, then you’re not doing the government (or your country) any favors and are only hurting yourself, specifically by giving Uncle Sam, the I.R.S., or whatever you’d like to call it, a far bigger slice of your hard-earned pie than they are entitled to.
MY ADVICE, FROM ONE MUSICIAN/ENTERTAINER/ARTIST/AUTHOR/ENTREPRENEUR/SOLE PROPRIETOR TO ANOTHER
My advice? Make the acquaintance of a tax professional who can help you with your taxes, if you haven’t already done so, and do it as soon as possible. Based on my experience, they are well worth the little they charge to ensure that you are not only paying what you owe (which helps you avoid interest and back-taxes later in life, not to mention potential jail time) but that you are also not paying more than you should. Additionally, educate yourself with regards to business-related taxes owed by sole proprietor’s legal strategies for reducing your tax burden by doing a combination of Google searches on the subjects and some old-fashioned reading of things such as For Dummies books and the like, relative to running a small business. Oh, and while you’re at it…don’t forget to deduct the cost of the books on your next year’s tax return, so that instead of giving your hard-earned money to the government, you give it to yourself, in the form of an investment into your own future.
Thank you so much for taking time out of your busy schedule to be here today! I hope you’ve enjoyed reading this post as much as I enjoyed writing it!
Please leave a comment below and tell me how you feel about this post, or better yet, visit its sister thread in the Manifestation Machine Forum and join the discussion about the topics covered herein. I can’t wait to hear from you, and neither can the millions upon millions of your fellow Mechanics!