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NotchontheRocks
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28th November 2012
Old 28th November 2012
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Tax question

Currently, I only offer freelance audio services for some extra money while I have a regular, full-time job. I am considering building/publishing an online mastering website to generate more work/income from audio services. My question is: if I got a website up and running and started to generate more income through it, how do I work it when it comes taxes? Do I need to do something different as a "business" (do I need a business license?), or am I able to just claim it as extra income for myself since I'm doing it from home and have no employees? What if I generated enough income to go fulltime with it (I'm aware it's a long shot but would like to know the scenario anyway)? Any help on the matter would be appreciated. Thanks.
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28th November 2012
Old 28th November 2012
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That depends entirely on in which country you live in and in what countries your customers are.

Mastering is mostly a "service" but the actual CD or DVD is a "product". A service is not necessarily subject to VAT when you export, but a product could be VAT'ed as well as tolled. This sometimes depends on the total size of your exports. Both a service and a product could be subject to VAT in your home country.

If you live in a civilized country (this definition is of course debatable) you will normally have to pay taxes if you earn any kind of money. It does not matter if you do it from home or you are the sole proprietor. In Denmark we even pay taxes of the value of your friend's help, if it exceeds a certain value (so much for being civilized).

The tax system varies a lot from country to country. If you live in Denmark, you pay so-called A-tax of your salary, which is about 45-63%. Then you pay an additional 25% VAT on anything you buy, but I digress... If you earn additional money you would most likely report it as B-income, of which you would be taxed the same percentage or most likely a higher percentage, since it would bump you into a higher tax bracket. If you set up a sole proprietorship you can deduct the costs of running a business, but you will have to add 25% VAT to your services, which you have to pay back to the state. The profits are paid out to you and taxed as B-income. If you have something else as your main income, the state would most likely consider your business a hobby, not allow you to deduct any costs, and tax you for the full amount instead.

I suggest you contact your local tax office and ask them as well as getting an accountant if you decide to setup business.
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29th November 2012
Old 29th November 2012
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In the US, you can work as a self-employed independent contractor and use your SSN as your TIN. No business license necessary (unless I've been doin' it wrong these past 7 or 8 years!).

The tax rate for the self employed is pretty high, but the big benefit is you can write off a lot of purchases as business expenses. Though I'm not sure how it would impact the taxes you owe on your day job (my audio gig is my only job).
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30th November 2012
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Tax / Business guide

For those in Australia, this may be helpful:
http://www.amin.org.au/wp-content/up...N-Tax-Pack.pdf

Although targeted at musicians, it pretty much applies to anyone running their own show in the music biz.
Quote:
A simple guide on how to approach the numbers side of the music business and how to help you help yourself when
it comes to running your business. This guide has the following sections:
1. Your situation
2. Structures
3. Registrations
4. Record keeping
5. GST
6. The tax department likes … you?
7. I’m with the band
8. Typical income and deductions
9. International issues
10. Useful contacts and links
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30th November 2012
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If you don't have an accountant, you need one. Do that first and go from there.
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30th November 2012
Old 30th November 2012
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Just remember, no matter how good you are, there's enough bad online mastering services out there that you'll probably lose money in this endeavor. At the very least, you can write off the expenses (at least for a while. If you lose money for too long, they don't let you claim the loss anymore). Just make sure you keep printed receipts for everything and log everything in a spread sheet.
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30th November 2012
Old 30th November 2012
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In the UK, profits you make working freelance are just taxed in the same way as normal income - the only difference is you have to file a tax return instead of it being done automatically, which means registering online. And yes whatever country you are in keep all your receipts otherwise you will have to pay tax on all the income.
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30th November 2012
Old 30th November 2012
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Here's some reality from personal experience... not fun on a Sunday morning.
Writing-off your music expenses is a sure way to get the IRS on your doorstep.
Special agents look for "recording studio" flags. You will be audited. Abuses from too many jerks in past have ruined legit business accounts for the rest of us nice folks. Especially in southern California from San Diego to Los Angeles.
Shoe boxes full of receipts don't matter. You are asking for trouble if you declare anything without owning the master tapes as proof.
Otherwise they think you are just another ripoff, even though you aren't.
Your accountant will hide from the whole affair and you will be left alone dealing with the tax audit.
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NotchontheRocks
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30th November 2012
Old 30th November 2012
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Quote:
Originally Posted by wado1942 View Post
Just remember, no matter how good you are, there's enough bad online mastering services out there that you'll probably lose money in this endeavor. At the very least, you can write off the expenses (at least for a while. If you lose money for too long, they don't let you claim the loss anymore). Just make sure you keep printed receipts for everything and log everything in a spread sheet.
Hmm. What do you think makes these online mastering services bad? Is it the perception of their quality of work, the potential lack of communication between the engineer and client, or is it something else altogether?
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30th November 2012
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An absurd and uninformed commentary in the main so far here.
No one is inviting an audit simply because they earn money in the recording business. Overall tax rates for self employed individuals ARE NOT higher than for those that work for others. What IS higher is self employment tax since you must pay both sides of social security---those that you would normally pay and also you must pay what the employer would pay. Currently this self employed tax is 15.5%.

If you start a new business you first obtain a local business license and then you obtain a tax ID number from the IRS. A tax ID number is part of the Homeland Security checks done on monies earned by individuals in the USA. The rules were recently changed to make even those individuals who have no employees required to have a tax ID number.

Even if the recording side of the business is not your full time business, you can still file a Schedule C. This lists income and expenses for your business.
Generally you must show a profit to deduct business expenses. On the Schedule C you also show depreciation, Section 179 expenses, office expenses, start up costs and many other categories of expenses and income.

Income from your Schedule C flows on to your regular 1040 income tax form.

This is just the barest overview of the topic, but I do hit the highlights that you need to be aware of.

It is best to have an accountant / tax advisor to make sure you are filing correctly and who can also help you identify items that need to be classified properly. Then, because it is properly done, even if there is an audit, you will be safe.

The watchword for over one hundred years of tax awareness is:

"To avoid is legal, to evade is illegal."
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30th November 2012
Old 30th November 2012
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Quote:
Originally Posted by NotchontheRocks View Post
Hmm. What do you think makes these online mastering services bad? Is it the perception of their quality of work, the potential lack of communication between the engineer and client, or is it something else altogether?
There's several reasons. The biggest one is probably inexperienced or otherwise clueless individuals pretending to be pros and hiding behind a web site that can make them appear to be just about anything. It even goes as far as stealing pictures and info from legit facilities. As small of an operation as I run, many sites have taken my articles and posted them as if their own.
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30th November 2012
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My biggest expenses by far around 2006-2008 were too my lawyer getting hack "online mastering facilities" to remove my photos, my gear list, even occasionally my client listing - from their sites. Occasionally, my entire site with the logo and name changed.

"Less than serious and trustworthy persons" are everywhere.
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30th November 2012
Old 30th November 2012
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In US, as mentioned,
1. Self employed
2. LLC
3. Inc

All have benefits based on situation and income. It is a service what you do so its just a matter of organizing what works for you. Make money, write off what you can including gear and office etc. Get an accountant who doesnt break the rules but hell bends them.
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NotchontheRocks
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30th November 2012
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Quote:
Originally Posted by MASSIVE Master View Post
My biggest expenses by far around 2006-2008 were too my lawyer getting hack "online mastering facilities" to remove my photos, my gear list, even occasionally my client listing - from their sites. Occasionally, my entire site with the logo and name changed.

"Less than serious and trustworthy persons" are everywhere.
Wow that's extremely unfortunate. I have no intention of doing something like that. I have my own photos, logos, and articles, and I don't want to pretend I'm something I'm not. I'm an ITB studio aimed at clients with lower budgets. I do not claim to have gear that I don't own. I do know what I'm doing, though, despite my little experience compared to alot of you, and have received a lot of positive feedback from clients and professional, experienced mastering engineers. My intent was to master for those with lower budgets so they can realize what the process has to offer, all while building a client base, experience, and a better studio. I thought an online mastering studio was a good way to do so. :confused:

Sent from my DROID BIONIC
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1st December 2012
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Don't get me wrong -- I wasn't suggesting you would. It's just that many *do* - which makes trying to set yourself apart from pack makes it incredibly difficult to do so at this point. Granted - The "general public" is getting smart to this sort of stuff - unfortunately, they're becoming more jaded as well.

Nothing wrong with what you're attempting -- Just keep in mind that hundreds and hundreds of others are attempting the same. And many "don't play fair" (for lack of a better term) making it much harder on those that do.
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1st December 2012
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Quote:
Originally Posted by MASSIVE Master View Post
Don't get me wrong -- I wasn't suggesting you would. It's just that many *do* - which makes trying to set yourself apart from pack makes it incredibly difficult to do so at this point. Granted - The "general public" is getting smart to this sort of stuff - unfortunately, they're becoming more jaded as well.

Nothing wrong with what you're attempting -- Just keep in mind that hundreds and hundreds of others are attempting the same. And many "don't play fair" (for lack of a better term) making it much harder on those that do.
This is definitely an issue if you have no clients at all, but if you have a few clients to start with and you're doing good work then word of mouth will spread. I'm sure nearly everyone on this forum would say that the vast majority of their work comes from word of mouth or credits, neither of which you can get from a flashy website (granted you can make up credits if you want, but it tends to be fairly obvious when someone has done that IMO).

The truth is that most of these hack websites are probably doing very little work, whereas talented engineers who just get on with it get busier and busier.
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1st December 2012
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Quote:
Originally Posted by Plush View Post
Overall tax rates for self employed individuals ARE NOT higher than for those that work for others. What IS higher is self employment tax since you must pay both sides of social security---those that you would normally pay and also you must pay what the employer would pay. Currently this self employed tax is 15.5%.


Self-employed persons absolutely face a bigger tax burden. Between income tax and the SS/medicare taxes you mentioned, it amounts to an overall higher rate than is typically paid by most of the general population.

Perhaps I didn't word my initial post as gracefully as I should have, but I feel your statement that "overall tax rates for self employed individuals ARE NOT higher than for those that work for others" is somewhat misleading.

Quote:
If you start a new business you first obtain a local business license and then you obtain a tax ID number from the IRS. A tax ID number is part of the Homeland Security checks done on monies earned by individuals in the USA. The rules were recently changed to make even those individuals who have no employees required to have a tax ID number.
My understanding is that a business license is only required for businesses overseen by the federal government (eg - transportation services, or selling booze). Perhaps, though, for some reason it varies by state?

As for the tax ID, could you post a link about the rule recently being changed? I hadn't heard about this, and my accountant didn't mention anything (nor did the federal government last tax season ).
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1st December 2012
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Get an accountant or do a legalzoom. My partner sets up LLC's/S-Corps on his own online at the state's .gov website.

1. LLC or S-Corp (a dba/self employed offers no liability protection as a separate entity if a lawsuit is brought or you want to shut down and bankrupt the company. Needed if you have creditors and the business is not doing well.)
2. Tax ID (get it online)
3. D&B number if you want to build business credit. (easy to get with a phone call. Tell them you have some interns starting next week).
4. Your LLC/S-Corp profit/loss/deductions will pass through to your personal returns.
5. You will need a separate business bank account for LLC/S-Corp.
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1st December 2012
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I do not have a business license. I merely operate as an independent contractor and claim my profits/expenses as such. You have to use a separate form for these when filing taxes, but it's not especially difficult and I haven't had any legal problems, nor did anybody mention anything about a license when I was having other people do my taxes (before my wife took over that job).
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1st December 2012
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In the City of Chicago every business has to have a business license. Could be the same in your locality.

My point about self employed income is that the tax rate is the same percentage as someone else earning the same money. Then the self employed person also has to pay self employment tax.

As far as IRS rules about tax ID, please research this yourself. You now have to have one if you file a Schedule C. SS # is no longer enough. Its about money tracking to prevent funding terrorists.

I want to convert to an LLC.
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2nd December 2012
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Quote:
Originally Posted by Plush View Post
In the City of Chicago every business has to have a business license. Could be the same in your locality.
Here in Boston, it's not.

Quote:
My point about self employed income is that the tax rate is the same percentage as someone else earning the same money. Then the self employed person also has to pay self employment tax.


Quote:
As far as IRS rules about tax ID, please research this yourself. You now have to have one if you file a Schedule C. SS # is no longer enough. Its about money tracking to prevent funding terrorists.
The reason I asked you for a citation is because I just checked out the IRS website, and on its most recent article (dated Oct 2012), it appears that you're incorrect:

Quote:
You will need an EIN if you answer "Yes" to any of the following questions.

-Do you have employees?

-Do you operate your business as a corporation or a partnership?

-Do you file any of these tax returns: Employment, Excise, or Alcohol, Tobacco and Firearms?

-Do you withhold taxes on income, other than wages, paid to a non-resident alien?

-Do you have a Keogh plan?

-Are you involved with any of the following types of organizations?
Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
Estates
Real estate mortgage investment conduits
Non-profit organizations
Farmers' cooperatives
Plan administrators
Do You Need an EIN?

...so I'm curious about where you found that particular info.
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2nd December 2012
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I did a bit more research, and here are a few things I've gathered:

- A sole proprietor reports all business income/expenses on his or her individual income tax return (1040 with Schedule C)
- I'll have to withhold my own taxes and pay estimated taxes throughout the year
- I'd have to register to receive a business license or tax registration certificate
- If I use a fictitious business name, I'll need to file a DBA

The only thing I'm not quite clear on is a seller's license because I'm not necessarily selling goods, but there may be an exchange of CDs and other media.

Is this all pretty accurate? It seems kind of straight forward and simple as long as I keep good records and don't try to claim too many expenses.
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2nd December 2012
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Quote:
Originally Posted by bgrotto View Post
Here in Boston, it's not.







The reason I asked you for a citation is because I just checked out the IRS website, and on its most recent article (dated Oct 2012), it appears that you're incorrect:



Do You Need an EIN?

...so I'm curious about where you found that particular info.


I got my instruction on EIN from my tax attorney. He told me about the changes.

This is the wrong forum for this advice. Please discuss with your own expert. I never should have brought it up here.
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2nd December 2012
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Quote:
Originally Posted by Plush View Post
This is the wrong forum for this advice. Please discuss with your own expert.
+1

Consult a professional. If you don't the misery it could cause is overwhelming. I know- I used to be an income tax auditor. I hated it.
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2nd December 2012
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Quote:
Originally Posted by Plush View Post
Please discuss with your own expert.
We can definitely agree on that!
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