3 tips to improve money tracking for independent musicians

Keeping your finances organized can sometimes feel impossible when you are a musician with multiple income streams. I have outlined the three most important lessons every musician should learn to keep track of their money and always be prepared for tax time.

1. Use tracking software instead of spreadsheets Spreadsheets are a perfectly fine way to track business activity, but there is a lot of room for error and the volume of transactions can get overwhelming. Bookkeeping software offers a more organized solution with a visual presentation that makes entering information and running reports easier. While there is a learning curve, bookkeeping software greatly reduces user errors and saves time. There is a wide range of free programs like Wave, which are great for musicians earning most of their income from gigs and teaching. QuickBooks is the most popular software for a range of industries. QuickBooks Self-Employed is a powerful tool allowing the user to categorize their expenses using the IRS form 1040 categories, meaning QBSE generates a Profit and Loss statement that directly corresponds to your tax return. It can also track W2 income, and health and vehicle expenses to provide a complete tax profile to closely predict your total tax bill or refund. QuickBooks Online is a great option for musicians with a more complicated career. QBO can track business loans, royalties owed, instruments/equipment assets, and even income vs expenses per project. Subscription tiers allow users to tailor QuickBooks to their own needs and budget. As a ProAdvisor, I am able to offer a free one-month trial plus 50% discount for the first three months after that. Just ask me about setting up a Zoom call! Occasionally a client will tell me their accountant recommended they get QuickBooks Desktop. QBD is not at all user friendly or intuitive for non-accountants, and also very expensive. There are other ways for accountants to get the information they need without placing a heavy burden on the client.
   

2. Understand Financial Statements Understanding your financial statements and the categories that go on them will demystify how to choose the right category for a transaction. There are five main categories in total. Income refers to money earned, and expenses to money spent on goods and services. The Profit and Loss Statement reports these categories and subtracts expenses from income to get net profit or loss. Assets are property that add value to a business, such as expensive instruments and equipment, but also bank accounts and cash. Liabilities are some form of debt owed, like credit cards and loans. Equity is literally assets minus liabilities, which translates to the value of your ownership in the business. Assets, liabilities, and equity are reported on the Balance Sheet. Basically, the Balance Sheet reports the value of a business and helps owners keep track of their property and debts. Of course, this is only a simple explanation that gets more complicated depending on each business.
   

3. Know Your Business Structure An independent musician most likely files their taxes as a sole proprietorship, but some run their businesses as small corporations instead. Understanding your business structure is important for knowing how to pay yourself and for filing taxes. A sole proprietorship is legally indistinguishable from the owner, and business profit or loss is reported on the owner's personal 1040 tax return. There are no legal restrictions to how much or how often an owner can pay themselves. Corporations are separate legal entities from their owners and are usually one of two varieties: S-Corp or C-Corp. A C-Corp pays it's own federal tax, and in turn the owners (called shareholders) also pay taxes on income paid by the corporation. An S-Corp does not pay its own taxes. Instead, all of the profit is reported on the owners' personal tax return, meaning it is only taxed at one level. Both types of corporations have restrictions on how shareholders can compensate themselves. An LLC is a type of business that can either be taxed as an individual or a corporation. LLCs protect the owner's personal assets while allowing owners more freedom in running the business than S or C-Corps. This article from ThomsonReuters is a great starting point for deciding the structure that is right for you. The administrative side of your music career can be overwhelming and confusing, but these tips should give you some direction. If you would like more help, please ask me about a 1-on-1 training session or direct bookkeeping services.