You and Your Money.
What they don’t teach you in music school!
For the Hamilton Musicians’ Guild, October 2015
Keeping proper financial records is a necessary task for anyone wishing to successfully pursue a career as a self-employed musician. This is article is the second installment dedicated to musicians who are new to the business side of earning a living from their musical activities. You may be a person who works a day job and is issued a T4 at the end of the year by your employer plus you have self-employed income of which your paid activities as a musician may be just a part. Keeping the business records initially is fairly straight forward but requires discipline and commitment during the course of the year.
Tax evasion is the process of not paying your properly calculated taxes. It is a crime. Tax avoidance is a process of paying your properly calculated taxes where the taxes that you pay are minimized in accordance with Canadian tax laws. These laws invariably change almost every year as politicians vie for re-election and modify their social policies. Once every 18 months I get approached by someone who is looking for an accountant to help him with his taxes because he has not filed a tax return for five years. These people have inflicted on themselves a nightmare of their own creation. Do not be one of these people.
In general: Revenues minus expenses = net income or taxable income
You are required to keep a full listing of all revenues that you receive as employment income. If someone pays you for your services and they maintain their own set of books and that transaction is going to be recorded on their books then you also have to record it in your own accounting records. Keep a handwritten page or an Excel spreadsheet where you record all of the revenues for the year: the amount, the place, the time, and the person who paid you or is going to paying you. Maintain a copy or a photo copy of everything for which you received payment especially handwritten cheques before you deposit them. Add these receipts up to arrive at a total revenue for the year and give this figure along with the backup to your accountant. Do not provide totals by months because your accountant needs the total for the year to use in the tax return calculations. If you are a band leader or group leader on a gig and you pay side musicians then the best procedure is to record the money you received in total from your customer and then keep a record of the disbursements that you made to your side men for each job that you worked otherwise all of the money could be attributed to you by the CRA.
Expenses: What to include – EVERYTHING – everything that applies to the effort you expended to generate the revenues that you earned. This is where tax avoidance comes in – maximize the expenses that you claim plus use any personal tax credits that are available to you.
Try keeping a travel log of the kilometres that you drive for business. The current CRA rates for an expense deduction are $0.55 per kilometer for the first 5,000 kilometres and $0.49 per kilometer thereafter. The total kilometres resets to zero every January first. If you drive long distances, this expense total may exceed the total of all of the other individual auto expenses plus it provides a fairly irrefutable record of your business travel for the CRA. Try it for a couple of months and then pick whichever method offers you the higher expense deduction.
HST is a topic for a different article. Your accountant can help you with this. If your total self-employed business revenue from all sources exceeds $30,000 a year you have to file an HST return. Your tax bill and your HST bill require two separate filings. Group your expense receipts by type of expense. Total them for the year and if you are subject to filing an HST return then have the HST for both revenues and expenses by each revenue and expense type already totaled for your accountant.
One of my service providers stated a couple of months ago that he always considered that a good accountant saved him more than he cost.
For earnings from self-employment, many musicians set aside a standard cash balance of 15% of their total receipts as a reserve to pay their income taxes at the end of the year. What percentage you set aside should match your tax bracket. If you have to pay HST then I suggest that you also set aside a reserve to pay for HST. This money is not yours so don’t play with it. Set up a separate bank account for business and another for the reserves if you have to. File your tax returns on time. Being late simply provides an opportunity for the CRA to charge you late fees and interest on overdue payments. This is the digital age, the CRA does not forget about you. For example; say that you owe tax for 2014 and do not file your return for 2014 on time then the late-filing penalty is 5% of your 2014 balance owing, plus 1% of your balance owing for each full month that your return is late, to a maximum of 12 months. Government late fees and fines generally do not comprise a tax deductible expense.
For my clients I offer some spreadsheets that they can use to initiate their own organized record keeping. The best way to keep your records is to simply jot them down every weekend as you complete the week’s activities otherwise you will tend forget what you’ve done and once you get in the groove it’s pretty straightforward. A little preparation time upfront can save you money and headaches down the road. Best regards to you in these endeavors and good luck with your musical activities.
Any comments or viewpoints expressed in this article are those of Kevin Mann Accounting.
Copyright Kevin Mann Accounting. 2015.
