After you start your business, it is important to keep records of your income and expenses because you can write-off certain expenses on your taxes and you also have to report revenue that’s generated as well.
One of the best ways to keep your accounts in order is to use accounting software like Quicken, FreshBooks, or any other one that’s out there. There are also apps and web-based software like Mint that can help you keep track of your transactions. A more tedious way is to keep a spreadsheet of your transactions yourself.
With any software program you will have to categorize your transactions and this is very helpful during tax season. Some programs allow you to create separate tax categories as well. Here are some of the categories I use:
- Performance Income – income from performances and live events
- Music Sales – income from CDs, MP3s, etc.
- Ad Revenue – income from ads on my blog or YouTube Channel
- Licensing – income from my performing rights organization statements
Contract labor – I use this for when I have to hire a musician for a performance
Travel Expense – I use this for when I buy any tickets to a performance or event that I am participating in
Meals and Entertainment – I use this for when I take clients out to eat for a business meeting
Office Expense – I use this for any stationary materials I purchase for my office
Advertising – I use this for my webpage expenses and any Google or Facebook ads I pay for
Auto Expense – I use this if there any tolls or parking I have to pay on my way to a performance and for the gas I used as well
Professional or Legal Fees – I use this for any lawyer fees or association memberships that I have to pay for
Charitable Contributions – I use this if I donate a CD to a charity event as a giveaway
Insurance – I use this if I have to pay insurance for an event or if I have insurance on my musical instruments
Remember for any individual or business that you hire to complete work for you that you pay over $600 to, you have to generate a 1099 tax form and send it to them by January 31st every year. You also have to report this information on your taxes as well. This means that you have to get the Social Security number or Tax ID number of the individual or business before you do your taxes. I usually get this information by sending them a W-2 form that they have to fill out before they get their payment. This form will have all the data needed to file your 1099 tax form.*
You can also write off on your taxes the depreciation of high-priced equipment purchases like computers, musical instruments and software, just keep the receipt (or make a digital copy).*
By having your accounts and categories organized you will have an easier time during tax season preparing your information. Another important benefit of having organized data about your income and expenses is the ability to forecast and plan your business for some important goals you are trying to achieve.
By having accurate data about your business income you can plan for major purchases like a new computer or studio equipment. You can also forecast how much you will potentially make so you can possibly get a loan to buy a building for a recording studio.
Having detailed financial information about your music business is an important tool in being able to sustain your activities and grow them in the future.
*None of this information should be considered as professional tax advice. You should consult a tax professional to get up-to-date and accurate information on these topics.