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Saturday, June 10, 2017

Seven Tips for Singer Taxes: Tip #4

This is another article in the Seven Tips for Singer Taxes series. And while I know that tax season has long since come and gone, my hope is that if you start implementing these tips now, it'll be much easier for you when tax season arrives next year.
Thus far we've covered some of the basics and the first few tips:
Tip #1: Keep a log of all your income.
Tip #2: Put all your self-employment income into a separate checking account.
Tip #3: Only use your business checking account for business.
So we've covered the money going into that business checking account, and some of the things to spend that money on. Now for the next tip!
Tip #4: Save for and pay estimated taxes.
This series is about taxes, after all. Before we get into paying the estimated taxes, let's back up a couple steps.

Remember back when we were discussing how in a normal employer-employee situation, the employer takes a bit out of each paycheck to pay your taxes for you throughout the year? Well, as a singer you work for yourself. You are going to have to recreate that same process on your own.

To do this, you are going to need to open another account, this time a savings or a money market account. Like before, it needs to be separate from your personal accounts. It also needs to be separate from your business checking account. This is your "Music Taxes" account, and its one and only purpose is to collect tax money.

To fill it, we put in a percentage of everything that you earn as an independent contractor. So if your singing (or teaching) earns you $100, you take $15 of that $100 from your business checking account and put it in your Music Taxes savings account. The percentage to use varies from person to person, but 15% off the top line is usually what you'll need as a singer. If it's going to be a big year, go for 20%.

You have two different options to do the transfer.

Option #1 goes like this: When you have your income log open and a stack of deposits to do (like we discussed in Tip #1), do your deposits and at the end of it, total up what went in that day (including cash), and then transfer out a percentage of the total.

In this day of smartphones, it's pretty easy. I would staple stacks of checks together after depositing them with my bank's smartphone app. Then, I'd write on the top of the stack how much needed to be transferred for taxes, and I'd do that transfer with my phone, too, all in one sitting.

Now that I've gotten he hang of it, I have another way of doing it. For Option #2, I now only do it once a month. So instead of transferring as money comes into the Business Checking Account, I take out a percentage as the money comes out as wages. Now when I draw income from my account each month (read more below!), I make a second transfer as a percentage, and put that into the Music Taxes savings account.

Either option will work, but I think I would suggest doing Option #1 for the first year, just so you get the hang of it. But having the Music Taxes savings account well-stocked gives you the money you need to pay Estimated Taxes, and you'll always have enough when the time comes.

That time comes four times a year:
Payment #1 — mid-April (when you pay your other taxes)
Payment #2 — mid-June
Payment #3 — mid-September
Payment #4 — mid-January (of the next year)

For the fourth payment, I do that in December instead of January, because for me, it's easier to find all four payments when they are in the same calendar year that they apply to.

So four times a year, take money out of your Music Taxes account to pay your Estimated Taxes. My preferred way is through the IRS website itself, through what they call Direct Pay. Just plug in the Music Taxes' account number, routing number, and the amount, and you're good to go.

How much you pay usually depends on either what you paid last year in taxes, or what you estimate your current year's income to be. There's some forms or software that can get you a good number.

If you send you payment by mail, send it with a voucher called Form 1040ES (Find it here). If you did a Schedule C for self-employment on last year's return, the IRS might send you vouchers that you can use. They're pre-filled with everything except the amount.

Let's be clear, though. "Estimated Taxes" are not "Optional Taxes." If you don't do estimated payments, you can be hit with a particularly nasty fee. Doing it the way I've lined out, however, means that you'll always have the money to do it!

Now for the fun part: After you pay your taxes and your business taxes, what left over in the Business Checking Account is called Net Profit, a.k.a. your money!

Well, almost. You do need to leave some of it sitting in the checking account to act as a buffer for those months that you are unemployed or underemployed. Roughly, keep enough in there to survive about three months without any work.

Add to that any expenses coming up in the next few months, like plane tickets during audition season. All that put together is called your buffer (also called Retained Earnings), and you should try to crimp and save until you have a suitable buffer.

Anything above the buffer, however, is all yours! Now it's time to pay yourself! Drawing down the Business Checking account to whatever buffer level you decide to set, and transfer it to your own personal accounts. There, finally, is the money you can use to buy groceries and pay rent.

Confusing? When making the video for this process, I thought it might be handy to have a visual aid. So I made a flowchart to summarize it all!

And that's it for Tip #4!

These first few tips revolved more around budgeting and accounting. For the next couple tips, I'll get into some of the heavy-hitters of "business expenses." Come back soon!

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