Taxidermy for Performing Artists?

This week I’m scheduled to speak at Point Park University on the subject of tax issues for artists.  Teachers there asked the PICPA to find someone to talk about the topic.  Let’s face it, artists have an uphill climb economically to start with, and yes it turns out their typical tax situation is more complex than most of us will face.

There are three areas where artists stand out from the crowd from a tax perspective.  Artists are more likely than not to:

• ·         have multiple income streams,
• ·         be both an employee and an independent contractor, and
• ·         be taxed in multiple jurisdictions.

 And you thought the threat of chronic poverty was enough to keep someone from wanting to be the next American Idol.

The discussion at the University will focus on income taxes.  Performers get income like most of us from employers or contracts, but they also can be compensated through barter arrangements (I’ll play at your wedding if you’ll cater my party) or get free products for appearances or endorsements.  All of that counts as compensation, and the IRS knows this better than most performers.

Then there’s the issue of what is deductible.  If an artist works as an independent contractor they can deduct the costs associated with the “business”.  Typically this will focus on supplies, research, travel and entertainment and rehearsal / work space in the home.  All of these are favorite topics for IRS auditors, who unlike the artists are doing tax stuff for a living.  So guess who usually knows more.

Another potential trap for artists is related to income fluctuations and paying enough taxes in the current year.  You’re supposed to pay taxes as you go.  For an employee that means your employer holds the taxes from your paycheck and for contractors you pay estimates of your taxes every quarter.  While this seems straightforward notice I used the word estimate as to what you pay.  Our Federal tax system is progressive, which means the more money you make, the higher tax rate you pay.  (This is not a time to get into Warren Buffet’s and Mitt Romney’s tax returns!)  If your employer withholds at the wrong rate because you have multiple jobs, you pay the penalties and interest for underpayment.  Same goes for calculating your estimates.  Changing income levels is a problem for may people, so the IRS does allow the “safe harbor” of essentially paying the same amount in taxes as you did last year until you file your return.  At that point you need to make sure you have enough money to pay Uncle Sam what you owe. 

One person who had particular problems with doing just that was Mark Twain. While there are more contemporary examples of artists with tax troubles, I couldn't resist Twain's take on the situation -- which unfortunately is still relevant. Hopefully some of the students I see this week will enjoy a version of Mark Twain's artistic success, but not his tax problems.