Re: Band Finances

["Michael Polesky" <m.polesky@xxxxxxxxxxx>]

Hi All,

A couple of questions were asked about how to properly handle the tax
liability of a working band.  The best way to do it is to ASK YOUR TAX
PROFESSIONAL.  Only a tax professional who is intimately familiar with
your specific situation can give you the proper advice YOU need.  Now,
I actually am a tax professional, but I can't give anyone specific
advice here, just some general rules to follow to help guide you
along.

First off, it's a much easier process if you can get a particular
establishment or festival to provide separate checks for each
musician.  They will likely require the social security number and
address of each band member and, when you are managing in a working
band, you should know this information too.  Because, if the employer
will only write out one check, then you will have to report any
payments you make to the IRS on forms 1096 and forms 1099-MISC.  In
order to fill out these forms you will need correct social security
numbers and addresses for each individual that requires reporting.

Reporting Requirements
Any individual whom you pay over $600 (for your business) in a given
calendar year qualifies for a form 1099-MISC.  This is cumulative over
the calendar year and not for one specific event.  So, if you have 6
gigs and you pay one musician $100 for each gig (wouldn't that be
nice) you need to report all $600 to the IRS at the end of the year.

Form 1099-MISC and 1096
Form 1099-MISC is the form you will use to report the information for
each individual you pay more than $600 dollars.  You supply copies of
this form to both the IRS and the individual whose income you
reported.  Form 1096 is the form you use to report the total for your
business to the IRS.  Forms 1099-MISC and 1096 can usually be bought
together in the same package around February or March at any large
office supply chain.  You can also order free forms from the IRS
directly by calling 1-800-829-1040 and requesting them.

The most current instructions for 1099-MISC can be found at:
http://www.irs.gov/pub/irs-pdf/i1099_02.pdf on page 45 of 80.  The box
you use on form 1099-MISC to report musicians' fees is Box 7 -
Nonemployee Compensation.  Read the instructions carefully and ask a
tax professional if you have questions.

The most current instructions for form 1096 can be found at:
http://www.irs.gov/pub/irs-pdf/f1096_03.pdf.  Remember that you have
to mark on the form that the type of 1099 you are supplying is
1099-MISC.  Most of the other stuff on these forms is pretty easy to
figure out from the instructions.

Successive Years Of Losses and Hobbies
ASK YOUR TAX PROFESSIONAL!  When you are a musician you are constant
risk of your business being ruled a "hobby" by the IRS if you are not
making enough profit.  The general rule is that your business must
make a profit 3 out of the last 5 years in order not to be considered
a hobby.  This is measured from the current tax year back.  This is a
general guideline that the IRS uses, but not a written rule.  I
suggest to my clients that they hold off on some of their gear
purchases from time to time so they can at least show a profit every
other year.  This is usually enough to prevent the IRS from declaring
your musician's earnings as "hobby" earnings. Hobby losses are not
deductible.  In order to determine if your business might be
considered a hobby there is some sparse information on the IRS website
at: http://www.irs.gov/businesses/small/article/0,,id=99239,00.html.
It is vague enough to give you an idea why you might want to check
your specific situation with a tax professional.

If all of this doesn't confuse you enough to go ask your tax
professional then I haven't done my job!  Good luck to your band.

Michael