I don’t know a DJ who wouldn’t want to spend as much time as possible spinning tunes and watching the crowd dance. But, business is business, and that means that DJs have to take a break from gigging to take care of their businesses.
Marketing, maintaining and purchasing equipment, paying the bills … all are part of what a DJ has to do on a daily, weekly and monthly basis to succeed. They may not be the most exciting part of running your own business, but they’re certainly as vital as the music itself.
Tax time has got to be the most stressful time of the year for DJs. If you leave organizing receipts, adding up earnings, and figuring out how much tax you owe to the last minute, you’re not alone. One tax professional told me that a client brought a box full of loose receipts to him a few days before the April deadline. It took hours for the two of them to sort all those slips of paper according to what was useful and what wasn’t.
So, for all of you who are breathing a sigh of relief because April won’t come around again till next year, that tax professional has a message for you: Be proactive!
A professional DJ really should keep paperwork organized throughout the year. Giving it a little time every week will make tax time a breeze. I asked Garret Nyberg, a Certified Professional Accountant at Boroff & Co. Inc., how DJs can prepare in advance before April rolls around again.
MMP: What tips can you offer regarding being organized from the start to the finish of the fiscal year?
GN: Whether you file your taxes yourself, or you have a licensed tax preparer file them for you, you should have a file where you keep your tax-related documents. When it comes time to prepare your taxes, you should have documents stating your income (1099’s, W2’s, bank statements), expenses (receipts, check register, etc.), and any other documents you may have received from the IRS throughout the year. If you want to take it a step further, you could be more organized by keeping track of your income and expenses in an Excel spreadsheet or using software such as QuickBooks.
A lot of our clients use QuickBooks Online because it automatically syncs with their bank accounts and credit cards. There are other accounting programs available that get the job done, or you can even just use Excel and track all the income and expenses there.
MMP: Are there misconceptions about write-offs/deductions that DJs might have and that you can correct (ex. meals, clothes)?
GN: When it comes to business deductions, it’s important to remember that expenses must be “ordinary and necessary” to be allowable as a deduction. That means you cannot write off every coffee you buy or every pair of shoes you purchase. A common misconception we see is DJs buy an outfit for a show and expect to be able to write it off on their tax return. More times than not, they can wear that outfit outside of their profession, therefore it is not considered a uniform and cannot be deducted.
MMP: What are some deductions that DJs might not be aware of?
GN: Most of the deductions are pretty straight forward, as in if you spend money on travel, equipment, etc., then you can deduct it against the income on your tax return. Contributions to retirement accounts can be deductible and many people, not just DJ’s, don’t realize you can save money on taxes while savings for the future.
MMP: Which less-obvious tax rules should DJs pay particular attention to?
GN: Since DJ’s can do a lot of traveling, it is important to remember that not all of the costs incurred on a trip can always be deducted on the tax return. If he/she goes on a trip to do a show, only the costs pertaining to the show can be deducted. Any additional activities such as sightseeing would not be deductible as a business expense.
MMP: How can a DJ know if his or her DJing constitutes a hobby or a business? Is there an income cut-off?
GN: Technically, the IRS defines an activity as a business if it has shown a profit in three of the last five years. So, as long as the business is making money and the owners are making changes to improve profitability, they will be considered to be a business by the IRS.
MMP: Are there filing (or deduction) differences by state?
GN: Yes, each state has their own income tax filing requirements (some don’t have income tax at all). So you should always check with your state taxing authority or a licensed tax preparer in your area to make sure you are getting the correct information for your state.
MMP: How much money should DJs reserve in order to ensure they have enough to pay any taxes they might end up owing?
GN: The amount that you should set aside depends on a few factors such as your tax bracket (Federal brackets range from 10% – 39.6%, and each state has their own bracket), whether or not you or your spouse has a job that has income tax withheld (paid via W-2), etc. So it’s usually beneficial for self-employed taxpayers to consult with a tax accountant to do tax planning so they can get an accurate amount to set aside.
MMP: Is hiring an accountant worth the expense? What criteria should DJs consider?
GN: When it comes time to prepare the tax return, it would be a good idea to hire an accountant for that, especially if the DJ has a business and personal tax return to file. For the day-to-day bookkeeping, it depends on the volume of transactions, desired detail of the reports, and the time/financial budget of the DJ.
When selecting a tax accountant, it is important to verify that they are licensed to prepare tax returns in that state (Certified Public Accountants or Enrolled Agents have sufficient licensing). Most accountants usually have a few niche industries that most of their clients work in, and it can helpful to work with one that knows the tax topics pertaining to the DJ industry.
MMP: What are the chances of being audited? How can DJs protect themselves from being audited? What should they do if they are audited?
GN: The chances of being audited are slim. In calendar year 2013, “the IRS audited…approximately 0.7% of all returns filed” (irs.gov). Self-employed taxpayers should keep documents that substantiate the income and expenses that are reported on their tax returns. Keep receipts, mileage logs, etc. so you can prove the legitimacy of an expense, if it is ever questioned by the IRS. If you are audited, you can always reach out to a local tax accountant for help/representation before the IRS if you are not comfortable doing it yourself.
Over to you: How do you keep your business paperwork organized?