Disclaimer: Use this quick guide as just that, a guide. I don't know diddly squat about your finances and as with anything in finance, any piece of advice is premised with 'well, it depends'. If you have specific questions please consult a tax advisor, financial planner, or business manager.
Tax returns can range greatly, from simple to very complex, depending on how you and/or your spouse earned your income and your personal situation, e.g. owning a home, having children, attending college, etc. High level, US personal tax returns have four sections, income, adjustments, taxes, credits. Some countries will tax citizens on a percentage of their assets (anything you own such as vehicles, investments, a home, etc.), some tax on spending (similar to our sales tax but to a greater degree), and some tax on income (this is what we do in the US). When you file your tax return you're letting Uncle Sam know how much you earned in the prior year, you reduce that amount with your adjustments and deductions, check a table to see what your tax liability is (that's how much you owe) and reduce that bill with any applicable credits, withholdings or prepayments.
This might be an easier way to think about it. Your friend is turning 30, woohoo! You decide to go to a bar to celebrate. While at the bar you order a drink. That drink was so good that you order a second drink. The second drink was terrible (you should have just gone back to the same bartender) so you complain to the manager and they remove the drink from your bill. You have an early morning the next day and decide to close out your tab so you ask for the bill. It just so happens to be 'Awesome Friend Night' and you get a $1 discount on your drink for being so cool and thoughtful. If you followed along with that story, you can grasp taxes. Your two drinks (income) were reduced to one because of the unskilled bartender (adjustments) and when you received your bill (tax liability) you realized the discount (tax credits). Obviously this is an oversimplification but you have to learn to walk before you can run.
Note: Several entertainers know that if they earned less than $600 for independent work they might not receive a 1099-MISC. The common misconception is that you don't have to report income if you don't receive this form, false! You, as the taxpayer, are required to keep accurate books, this means tracking your income and expenses. Keep a log of everything you earned throughout the year and when those W2s and 1099s start rolling in check them off in your log. Let your tax preparer know about anything that isn't checked off to make sure it's report correctly.
- Business Expenses for Artists (line 24) - If you're a Qualified Performing Artist (QPA) you're able to deduct all of your business-related expenses PLUS take the standard deduction. Most entertainers will earn income from both W2 (employee earnings) and 1099-MISCs (freelancer earnings). The IRS requires taxpayers to split out their expenses based on how they earned their money. For example, if you earned 60% of your income from W2s and 40% from 1099s you are required to split your expenses out the same way. Normally taxpayers would need to deduct the 40% of expenses from their 'Business Income' (1099 earnings) and deduct the 60% as an itemized expense. If your itemized expenses are lower than the standard deduction you won't be able to deduct any of those expenses. This is a way around that. Confusing, I know. If you want to learn a little more about QPA check this out. NPR's Planet Money also put together an amazing podcast around the history of this deduction, check it out below.
- Moving Expenses (line 26) - If you know you're destined to be a big star and packed everything you had into your hatchback and made the trek to LA, you might be able to deduct some of those expenses. This adjustment is available for any taxpayer that moved for a job. Of course there are specifications, this great article from TaxAct gets into some details.
- Self-Employment Tax Adjustment (line 27) - If you earned more in self-employed earnings (1099 earnings) than the expenses you incurred for self-employment (this is your net income) you're taxed a self-employment tax. You're able to take half of that amount as an adjustment to income. For example, let's say your self-employment tax is $1k, you can reduce your income by $500 as a self-employment tax adjustment. What's a self-employment tax you might ask. When you're employed by someone else you have Medicare and Social Security withheld from your paycheck/residuals. Your employer pays half of the bill and you have the other half withheld. Well when you're self-employed you're both the employee and the employer so you foot the entire bill, hence the self-employment tax.
- Student Loan Interest (line 33) - If you're one of the 40 million Americans with student loans and paid interest on those loans throughout the year you can adjust your income by that amount.
Once you deduct your adjustments from your income this is your Adjusted Gross Income (AGI).
Deductions - Ever wonder what people mean when they say they 'itemize'? This is it! The IRS allows you to either take the standard deduction, which is a set amount based on your filing status (Single, Married Filing Joint, Head of Household, etc.) or list out, itemize, your expenses. Of course it's only more advantageous to itemize if the amount is larger than the standard deduction. Here are some of the most common itemized deductions:
- State Income Tax - If you live in CA or NY you know all about being taxed at the state level. You can deduct state income taxes on your federal return.
- Real Estate Taxes - If you own a home you can deduct the taxes you pay your county or city for the land. If you have an impound or escrow account (if you pay the mortgage company and they pay your home insurance and real estate taxes) you should find this amount on your Form 1098.
- Mortgage Interest / Points - Same as your real estate taxes, this will be reported on Form 1098.
- Gifts - If you felt generous throughout the year and decided to give cash, stock, or property to a qualified charity you can deduct the value of what you donated. If you donated cash or stock you just enter the amount of what you donated. If you donate property, e.g. clothes, appliances, electronics, etc., and your charity doesn't list the value check out Goodwill's guide.
- Unreimbursed Employee Expenses - Remember the 60% of expenses mentioned in the Adjustments section above, this is where you can deduct that portion. As a reminder, if you earned W2 earnings throughout the year and are claiming any business expenses you have to separate unreimbursed employee expenses from self-employed expenses. This means that if you earned $60 from an employer (W2 earnings) and $40 from a freelance gig (self-employed earnings) 60% of your business expenses need to be claimed on this line.
- Tax Prep Fees - That's right, you can deduct the fee you paid last year for having a tax preparer file your return.
- Exemptions are much more straightforward. The IRS allows you a set amount for yourself and each dependent.
Once you figure out your itemized/standard deduction and exemptions you deduct those amounts from your AGI to figure your Taxable Income. Once you know how much you're finally taxed on you look on the IRS tax table to find your corresponding tax. Now that you have your income tax figured out you'll need to make sure there are no other applicable taxes. The most common additional tax for entertainers is the Self-Employment Tax, discussed before.
- Foreign Tax Credit - If you shot scenes outside of the US, most commonly Canada, or if you received residuals for a project that aired internationally and paid a foreign tax you could receive a credit for that.
- Retirement Savings Credit - Contributed to your retirement but didn't make a ton of money last year, you could be eligible for a credit for being such a good saver.
- Earned Income Credit (EIC) - If you earned income throughout the year (W2 or 1099 earnings) and are within certain income thresholds you could be eligible for the EIC.
- Excess Social Security - Currently, Social Security has a cap of $118k of income. This means that you only pay Social Security tax on income up to $118k, anything above that is exempt from SS tax. As an entertainer you might have a supporting or lead role in a movie or had a recurring role on a series and earned more than $118k. If you're not yet incorporated, your employer should cap your SS taxes at the federal limit but you might earn residuals from previous work or have earnings from other roles throughout the year that will withhold SS taxes because they weren't aware that you reached the cap. This is where those would be refunded.
refund or pay
Obviously, understanding taxes will take more than reading a single blog post but hopefully you've gained enough confidence to look at your tax return and know what some of the terms mean. There are literally hundreds of tax schedules, each used for a different purpose.
Take Away: Taxpayers might be more inclined to learn more about taxes if the entire IRS tax code were taught by Donald Duck.