If you often find yourself lost in calculations, this is the podcast for you. Barbara Johnson, a bookkeeper, CPA, and the owner of Keeping It Straight Bookkeeping & Accounting, shares insights on how you, as a musician and entrepreneur, can better manage your finances – from business and tax requirements and deductibles to general bookkeeping – saving you time and money without losing focus on your craft.
Watch the episode here
Listen to the podcast here
Music Business Management: Increasing Income Through Effective Bookkeeping & Tax Deductions with Barbara Johnson
I am here with Barbara Johnson. We are going to talk about something that not a lot of people talk about when it comes to musicians, and that is your finances. She is an accountant, a bookkeeper and a CPA. She does taxes and bookkeeping for all kinds of businesses, but I’ve been talking to her about the specific challenges of musicians and dealing with their finances. Before we do, I’d love to have you, Barbara, let them know a little bit about you, how you started working in this field, and maybe anything a little bit personal. I know you’re not a musician, but you’ve got some to create your creative side.
I was a musician for a long time. I started playing the piano when I was three years old because my father wanted me to go into music education, and I didn’t. I haven’t played the piano or anything since then. I played the trumpet and the piano. I know a little bit about music, at least somewhat. My father wanted me to be an accountant when I was younger because I was good with Math. I immediately joined the Navy and went in the opposite direction basically.
After being in the military for ten years, I got out and I was working for a game store called Wargames West in Albuquerque. They needed somebody to help out in the back room, doing inventory and bookkeeping and stuff, as well as running the store. I fell in love with it. I got my degree in Accounting. I have been doing taxes, bookkeeping and everything since then. I enjoyed it. It’s my passion. I love to help people. One way to do that is if you’re in business, you need to know where you’re going and the finances roadmap.
That’s interesting that you fell into it. It happened to me too. I was a Music major and then I had to take some practical art type of classes. I decided to take Accounting, and I fell in love with it also, which may be some of our readers are like, “That’s crazy, you fell in love with Accounting.” There’s something very grounding about the structure of accounting for me anyway.
Music space on Math, and so is Accounting. The nice thing about it is they’re both got a creative side to them.
You work with a ton of small business owners. Would you say that you work with a lot of sole proprietors?
Almost exclusively sole proprietors.
Pretty much most musicians are going to be sole proprietors unless they’re making a lot of money, a good deal of money where they’re going to want to or have a team that works with them and they’re going to become an S corp or a C corp, but most of them are sole proprietors. What are some of the biggest mistakes that you see sole proprietors make? Let’s start with maybe with their bookkeeping.
The first thing is a lot of people make as far as mistakes as they don’t keep track of it regularly. Bookkeeping is if you can collect all the receipts in the world and put them all in one little place, but when you go back to look at them, you don’t know what you spent because if you’ve ever looked at a Walmart receipt, it doesn’t list out everything. It’s got numbers and half a sentence. You’re like, “What was that? Was that business? What do I categorize that as?” One thing is not keeping up with it regularly. That is a big thing. The other thing is many sole proprietors don’t know things that can be deductible. Everybody thinks, “I can deduct the mileage in my car.” They sit and drive to the grocery store. They’re deducting that knowledge, but that’s not business mileage.
It doesn’t count from where you are to where you work. It’s everything after that. There are different things like that people keep track of that it’s great that you’re keeping track of it for your personal, but as far as being deductible, it isn’t deductible that way. People think that things aren’t deductible, and they are. The other thing with that is if you have an office in your house, some of your mortgage, rent, and electric can be deducted depending on how big your office is and how much your rent and all of that is. It’s a percentage that can be deducted with that. There are various ways that people don’t keep track of enough stuff or keep track of too much stuff.
I love to talk about the home office deduction because most musicians can take that. Most of them at least have a practice space in their home that they can count as a home office or they have a studio in the garage, bedroom or something like that. Most of the time, it would qualify.
For a home office, it has to be used regularly and exclusively for business. If you’ve got a piano sitting in the middle of your room, you’re not going to do much on that piano besides sit and practice or that type of thing. If you have a studio where you’re regularly practicing your music, pretty much that’s regular use. If it’s set up so that it’s basically only used for that, it’s the perfect type of space to be a home office. That is deductible, which is a percentage of even your mortgage, electricity and everything that can be written off for taxes.
The key is it comes right off of any income that you make.
It’s less tax that you have.
It’s one of the best deductions that you can take as a sole proprietor, in my opinion. I think that there are a lot of misconceptions among musicians about even how to deal with the stuff on their taxes. I know that I’ve done a few tax tips and stuff on social media. I see there are a lot of people confused about like, “If I have a business, do I have to do a Schedule C?” What advice can you give them? Where do they need to be at with their income to be filing a Schedule C on their taxes? What does that mean? Some of them might even not know what a Schedule C is.
A Schedule C is for anybody that is a sole proprietor. If you have a business and you’re making money, whether you’re using it all up and expenses or not, you should file a Schedule C, which is you take all of your income and you get to duck all of your expenses. Either you pay tax on whatever income you made, or if it’s a negative, it can offset any other income that you had. A lot of times, musicians that I’ve known have a second job. They have music, and that is their passion. That’s what they’re they do gigs with and they make money. They have a second job where they’re flipping burgers, and most of them don’t or whatever that second job.
A lot of them are working an office job or they are a teacher.
Music teacher, especially even. In those jobs, you get a W-2, and it says, “You’ve made this much money. You’ve had this much taxes.” Your Schedule C then can counterbalance against that. Either it will add extra income to it if you’ve made more money or it can subtract away from that income if you’ve had more expenses than income in the business. You have to be careful when doing that because the IRS does watch that closely to make sure it’s a business and not a hobby, but it can end up to your benefit to do both have a job and a business that you’re working at.
It definitely can because it allows you to write off many things against that income that you wouldn’t be able to write off otherwise. Where is that line as far as the way that IRS looks at it, whether it’s a business or a hobby?
The line is you have to start making positive income for 3 or 5 years. For most businesses in the first year, almost none of them make an actual income. Some of the strictly completely only service-based incomes and businesses, as in they have no outlay. They are an office that they do jobs on their computer. Even they won’t have a positive income their first year sometimes because they’ve got to buy a new computer or the software needs to be updated. They have to have certain files and different coaching programs.
After that, in the 2nd, 3rd, 4th or 5th year, the IRS checks on those. Those who want to start being making towards, you’re getting that income coming in onto the positive side because if you’re not making money, the IRS can’t tax it. That’s never a good situation to look at. That’s the whole point. They want to make sure you’re doing it as a business because if you’re doing it as a hobby or to lose money so that you don’t have to pay as much tax on your other job, they frown on that. You’re in business to make money. If you’re not making money, they want to see where you’re making corrections in order to be making money.
Sometimes musicians thinking, “Why wouldn’t I be making money every year?” It’s hard for them to wrap their mind around. They would be expecting to make income every year. Maybe you can explain why, especially like what you said about how people don’t make any money in the first year of business and might think, “Why would I want to be in business if I’m not making any money? Maybe you can explain how that’s different than not making any money on your IRS forms.
You can have an income, but like a lot of people, when they get started, like with a graphic designer or a musician, when you’re doing jobs on your IRS form, your cell phone that you’re using to make those calls to set up those jobs, that is a deduction. Your equipment, if you break a guitar string, if you need to get your piano tuned, if you need to buy a new electric keyboard because it broke, any type of those types of things, you pay for those and you don’t think about it, but those are expenses. They go against your income.
With the home office, you have a space set up to practice and as a studio. Those types of things that rent and income come off of your business income. Therefore you could be in the negative. In advertising, you’ve got to get your name somehow out there so that you can sell your songs or your music. Write songs for people. You’ve got to promote yourself somehow.
It’s like paying for your website costs.
If you do the LinkedIn, they’ve got the premium membership. That’s an annual membership, but LinkedIn is strictly for marketing your business. That can be a deduction. If you look at that, that can make you have a negative income, which means a negative income is not making a profit. You’re sitting there going, “I did make money. I did $1,000 in income. I did two jobs, and that was great,” but after you add up all the expenses, it doesn’t look that way.
It helps you pay for things you would’ve paid for. Like you said at the beginning, cell phone. I’m going to have a cell phone no matter what, but if I make $1,000 for the year in music, that paid for the entire year of my cell phone.
According to the tax return, you didn’t make an income, but you did.If you are in business, you need to know the financial roadmap and where you're going. Click To Tweet
It’s helpful to reframe that because people are like, “Why would I want to be in business if I didn’t make any money?” I look at all the things that I would normally pay for anyway, my internet, cell phone, and things like that I can write off that aren’t specific. There’s mileage and stuff, but you wouldn’t be doing that mileage if you didn’t go to the gig. But there are things that you would probably do anyway. For me, I write off my Spotify, my audible, things like that are subscriptions that I would potentially have anyway, that are totally business-related if you’re a musician.
If you take music lessons, as in, you want to increase your skill in something, you want to learn how to do something new or learn a different instrument even, that is deductible as well. Even those new skills, you want to get a coach to help you market your business so that you can sell your music more.
If you want to take one of my programs, they’re tax-deductible.
As long as they are helping future their business, which they do.
Let’s talk about equipment because I know musicians love their gear. They love to buy new gear. It’s fun. A lot of times, they’re not taking advantage of the fact that they could be writing this off against their income. What are the rules around this? I know you can depreciate or, from what I remember from doing my own taxes, there’s a single-year deduction that you can take as well.
You can take what they call a Section 179 deduction on anything under $2,500 as far as equipment goes. If it costs less than $2,500, you can take it all in one year as a deduction to lower your income. The thing with that is that means if you go and buy a new guitar, amp, trumpet, violin, even by a computer that you’re using in your studio.
Even like a microphone, a webcam or any of those things.
As long as you’re using them in your business regularly, and I don’t mean every session. You might not use the guitar. You have two guitars, acoustic and electric. You may not use the electric in every song you produce. That’s not what’s required. You have to use it regularly as in, “I performed songs with this guitar. I use this microphone because it makes me sound this way, but this microphone makes me sound differently, so I use it better.” As long as you’re using it regularly in the business to do what you do to make money, it’s it qualifies. That’s a huge deduction for musicians.
A lot of musicians aren’t taking advantage of that. Guys, think about that. Think about all the things that you’ve bought over the years that you probably haven’t. I know I’ve occasionally forgotten to write something. I’m like, “I got a new computer last year, and I completely forgot to write it off.” This is where I think it’s really important to keep your finances separate, as far as your personal and your business. How do you recommend that people do that?
The first and the first thing that the IRS requires is you have a separate business account. It’s completely separate from your personal. You don’t use your business account to buy yourself things and you don’t use your personal account to buy the business things. If you have to, transfer the money to whichever account it needs to be. There’s a money trail. For me, if I need some new accounting software, I transfer money from my personal into my business if I need to, then I use that to buy the accounting software.
I pay myself back because the business is making money and I transfer it back over. Either way, you do it. You want to have that paper trail and separate accounts for checking, savings and credit card because I know you don’t just walk into a store and plopped down $1,000 for something. Everybody puts it on a card, and you want to make sure that card starts out at $0 and then only use it for business.
While you’re at it, get a credit card that gives you some benefits. There are so many credit cards that either pay you back in cash. They pay you a statement credit you can use, get rewards from them that you could spend some other way. Those are available now. Why wouldn’t you get them if you’re going to spend the money anyway on your business?
That makes a nice setup. You need one specifically for business. It doesn’t have to be in the business name. It has to be specific and only used for business.
That’s what’s different about being a sole proprietor. You don’t have to have everything in your business name. Now that I am an S corp, I have to have everything in the business name because it needs to be completely separate. Luckily for you guys, you don’t have to do that. I said luckily, I thought, “It also does make it a little bit harder. It’s easy to commingle things when you’re a sole proprietor.”
I remember feeling like I didn’t know where my business was at because even though I was keeping things separate like you said, I needed to buy something in a business, so I would transfer money from my personal account. If I wanted to pay myself, I would transfer the money back. It starts to feel like you don’t really know how much you’re making in your business. How do you recommend that people make sure that they know what’s going on in their business finances?
That’s where having a bookkeeper or doing the bookkeeping yourself comes in. If you have a person or you do it yourself every week, put those receipts in, put the income in, monthly run a report. If you use QuickBooks online, that’s fantastic. I have services where I can help you set that up, or I can do the bookkeeping, but you want to have either a spreadsheet, QuickBooks or something where you can input those expenses and that income so you can look at it any time and go, “This is what I’ve made so far. This is where I’m at.”
You’d be surprised at how much money you do make and spend for the business. There have been people that, “I know I’m making $100,000, but why don’t I have any money in my bank account?” You’re spending $150,000 every year. I’m not sure why you think you’re making money that way. That happens because many times, sole proprietors don’t co-mingle, but they transfer stuff so much. They don’t know what’s going on in the business. It gets muddled. That’s when bookkeeping comes in.
Keeping up with it too. True confessions, I’ve done my own taxes for years, but because I was also an accountant, I was lazy about the bookkeeping because I would keep a spreadsheet and I knew exactly how much I had every day. I was used to this after working at the opera, where money was very tight. I would keep a cashflow spreadsheet and know exactly where it was at, but that also caused me to be very lazy in my bookkeeping. I’d get to the time of year when I needed to do taxes and I had to spend. My family would know. They’re like, “Stay away from her for three days,” because I would have to sit there and input everything that happened into the system because I hadn’t done it the whole time. That’s where bookkeeping can help. Most of you aren’t doing your own taxes anyway. Having someone that does both of those things at once will take a lot off of your mind.
With the people that I work with, it’s nice and simple. I keep up with their bookkeeping throughout the year. They can look and know exactly where they’re at any point in time and then come into the year. It rolls over, and we do their taxes as well. Everything is done. They don’t have to worry about that. They literally can focus on what they love doing most, making music.
The key is having somebody that’s “on your team” that you can go to whenever you have a question. If you’re like, “I’m thinking of buying this thing. I’m thinking of expanding my home so I can have a studio. How will this impact my taxes?” You can go to the person that you’re working with and ask those things before you even do them to make sure you understand how they’re going to impact you.
I’ve had people come to me, “I’m an LLC. I want to convert to an S corporation. When does that make sense? I should do that right now.” There’s a line where becoming an S corporation makes a big sense difference and where it costs more than it is a benefit. You have to find that line. The best thing to do is you ask somebody, “This is what I’m doing right now. I’m thinking of becoming an S corporation. What does that look like? Is it worth it?” That person needs specifically. We can look at it and go, “It’s going to save you $1,000 a year at least. No, it’s going to save you $5,000 a year. Let’s do that for sure.”
“I’m the CFO.” You don’t have to worry about anything. You make the decisions. You’re the CEO and you run the business. I literally handle all the financial stuff. If you have questions about financial stuff, you can look at the numbers and ask me because I’ve got many years of experience to be able to sit there and go, “This is the way it goes. This is what’s happening. This is where things are going.” You make the decision because you’re the CEO.
Having that peace of mind makes you feel like, “I’ve got this part covered. Now I can focus on the music.” To go back to that discussion about the S corp, number one, I’ve heard people saying things like, “Become an LLC. It helps you on your taxes.” That is absolutely not true. LLC is a legal entity. I’m not going to say whether you should or shouldn’t do that because that’s all about separating your business and personal and legally protecting yourself.
As a single member, LLC, you’re still a sole proprietor. As far as taxes go, it doesn’t help you at all. As far as protection and liability, it is a state entity. It does give you some limited liability unless you commingled funds, then it doesn’t do anything for you. If you mix your funds at all, all limited liability is out the door. There’s no limited liability there, but as far as taxes go, there’s no difference. You still file a Schedule C.
Unless you decide to elect as an S corp, which, as you were saying earlier, is that line to decide which one is better for you, different for everyone or is there kind of like an income level?
It’s different for everybody. Once you get into the $75,000 or $100,000 range, you look at it closer because when you come in S corporation, you have to separate everything completely. You’re filing two tax returns and then you have to look at. You have to then pay yourself a salary, so you have to go on payroll because you’re no longer an owner. You’re a member, a shareholder, and an employee of the S corporation. You have to pay yourself a reasonable salary. It doesn’t mean you can’t take any more money out, but then that counts as capital gains.
There’s a tax line there. You have to look at, “I’m paying now myself as an employee, and I’m taking this money out.” You’re going to pay taxes on both of those, but it’s different between them because you’re not paying that self-employment tax anymore. You’re paying it as the S corporation, and then you have the fee for doing two tax returns. You have to have one done by March 15th and the other by April 15th.
This is true whether you’re S corporate or not or if you’re an LLC. We have to pay like $800 a year to be an LLC in California.If you spend one hour a week getting things done, that saves you three days at the end of the year from having to try and get it all together. Click To Tweet
That’s a state filing fee.
In some states, it’s way cheaper. California is expensive.
A one-bedroom apartment for $1,000 or $1,200 a month. I had a friend telling me it was $1,200 for a one-bedroom apartment. I was like, “No, thank you. That’s too expensive for my blood. I’ll stay in Florida.”
That line is really helpful, that $75,000 to $100,000. If you guys who are reading are nearing that, even if you have people working for you like if you have contractors that are working for you, but your business is making that, I was started looking into it because for me, I waited a little too long and I ended up having to do it in the middle of the year. It made things messy. I should have done it in 2019, but I didn’t. I waited until 2020. It’s messy to do it in the middle of the year. I would try to look into it before you’re to the point where like, “I definitely need to do this because it’s going to save me a lot of money.”
According to the IRS, you need to file that election by March 15th if you want to be an S corporation for the year. For 2022, if you want it to be an S corporation, you need to file it by March 15th of 2022 so that in 2023, you’ll file that 1120-S instead of a normal schedule C.
You can file a thing that says, “I want it to be retroactive.”
That’s a late filing. You have to explain why it is a big bane.
I’m still going through it with the IRS because they’re slow now because of COVID that it’s still going on, even though this happened.
It takes forever. If you file it timely, it’s usually pretty quick because their normal systems take care of it.
I wish I would have got it on earlier or I had someone on my team that could have advised me better because I didn’t know when was the right time to do it. I’d heard about it. It seems like a good idea. I don’t know if it’s right by the time I looked into it. To put this in your guys’ minds, I know most of you are not up to that income level yet, but you may be. If you’re teaching privately or maybe you have a combo business, maybe you’re teaching privately and a performer, you may be up to that income level. You’d be able to look into that. I wanted to plant that seed. Is there anything else you want to let our readers know about their finances that we haven’t covered that you think is important?
You’ve hit most of the stuff. The biggest thing is to keep on the numbers. If you don’t keep track of that bookie, here’s one way to look at it. If you spend one hour a week getting it done, that saves you three days at the end of the year, having to try and get it all together.
Having your family hate you because you’re in such a bad mood.
It makes it so much easier. I have something special that I am running. For the members reading your show, l am offering $150 off bookkeeping services for the first four months. If anybody reading that could mention this show, you’ll get that discount for the first four months. I can get your QuickBooks set up, get you going, show you the value. At the end of the four months, if you don’t see the value in it, guaranteed, walk away. There’s no harm, no foul, but try it for four months and see what you think. That’s my whole thing with it.
This is such a great deal because you help them get set up. I feel like that is 3/4s of the battle of getting everything set up, getting your banks all attached correctly and everything talking to each other online is the thing that seems overwhelming that makes none of us start.
Literally, if you want me to set up, the charge is $500. I can do that for you and get it all set up. It takes probably two weeks and get it all done and ready for you. I’ll give you a little bit of training. You can take off and do it yourself. If I’m doing the monthly bookkeeping, it’s $350 minimum for monthly bookkeeping. Most musicians should fall into that area unless you’re doing a lot more than music. It was dropped down to $200 a month to try it out.
Readers, if you don’t have a good system for your bookkeeping, look into this. How do they contact you? First of all, if you guys mentioned either Bree noble or Profitable Musician, she’ll know that you came from this podcast, but how would they get in touch with you?
It’s very easy. My website is www.KISBAA.com. That’s KeepingItStraightBookkeepingAndAccounting.com. My email address would be Barbara.Johnson@KISBAA.com, or you can text me on my phone at (321) 320-2560. There are lots of ways to get in touch with me.
Reach out to her, even if you’re not sure if you need bookkeeping help. Ask her a few questions and see if it’s right for you.
The conversation is free.
Thank you so much. This has been great. Being that I have a business background, part of my mission for the show is to make sure that musicians at least understand what’s going on business-wise. Even if they’re not the ones that are doing the bookkeeping or taxes, at least they understand enough of how it all works so they don’t feel like they’re not in control of their own business.
That’s a good thing. Thank you very much for having me.
You are so welcome. I hope you guys reach out to Barbara. Thank you so much.
About Barbara Johnson
As an accountant, Barbara helps small to medium size business owners maximize their profit while limiting their tax liability. Barbara started Keeping It Straight Bookkeeping & Accounting to be a virtual accounting firm providing service to businesses all over the US. She is a member of the National Association of Certified Bookkeepers, the American Institute of Public Bookkeepers, a QuickBooks Online ProAdvisor, and a US Navy veteran. When not working with her clients to become the true CEO of their business, Barbara enjoys doing crafts such as crochet, knitting, and watching Disney movies with her best friend and companion animal, Princess Leia.