Private teachers and income tax

[BuyBuy]

So for all of us that teach privately in the US?

How do you guys manage to pay Uncle Sam? Do you file your taxes yourself? Do you hire an accountant?

How does the tax deductions work? Do you keep all of you gas receipts, sheet music receipts? Any tip on what can be included as tax deductions?

Is there any advantages in incorporating yourself? Is it worth the trouble?

Thanks for the input...

[ptmidwest]

These are deductible.  Keep track (yes, save these receipts) of these expenses:
--recital expenses
--music purchases that you are not reimbursed for by the student
--piano tuning and maintenance
--business/bookkeeping supplies (paperclips, paper, pens, etc.)
--postage
--advertising
--cost of printing notices, letters home, business cards, etc.
--professional magazines/periodicals
--professional organization fees or dues
--music and books you buy for your own continuing education

If your studio is used ONLY for business purposes, not just a corner in your living room, then the expenses of maintaining that room are deductible.  This has been increasingly abused by many "home" offices, so make sure you do this absolutely correctly.  Set it up with an accountant first, unless you are familiar with the current laws in your state and with federal.

Of course, keep track of the money you get paid!

There is an established cents-per-mile rate for deductible expenses, but they rarely can be used for piano teachers.  One exception is the mileage between two students' homes, if you teach in their homes.  (Going to the first house and returning from the last lesson are not deductible, but mileage between the 1st and 2nd, between the 2nd and 3rd, and between the 3rd and 4th, are sometimes deductible,  but not from the 4th back to your home.   This is not always true, so check first with an accountant who is familiar with self-employed tax rules.  Different states have different laws! It is rarely worth the trouble of keeping the records that are required.)

As for incorporating, that depends on how much you make.

Generally we are supposed to pay quarterly estimated income taxes.  Many teachers do not, for a number of valid and invalid reasons.

A good idea is to find an experienced accountant to set it up for you the right way, and then do it yourself after that first year if you can.  Some teachers think it's a breeze and others need an accountant each year.  Using an accountant means you do not have to keep up with ever-changing laws, and doing it yourself means you may be unaware of a better way to set up your taxes.  Depreciation of your instruments is a good example; do you really know how to do that according to U.S. tax codes?

[Torp]

Do you file your taxes yourself? Do you hire an accountant?

If you have the knowledge and the time, do it yourself.  Otherwise, hire a professional.  It's their job to stay on top of the ever-changing tax laws.

How does the tax deductions work? Do you keep all of you gas receipts, sheet music receipts? Any tip on what can be included as tax deductions?

Deductible business expenses are covered by Section 162 of the IRS code.  In a nutshell, any expense which is considered normal and customary for a particular line of business is deductible.  The challenges develop when we try to determine what is normal and customary.  This is where an good accountant can help you.

Yes, if you're going to deduct it, you need a receipt.  And, you will need to keep those receipts for as long as that particular tax year is auditable.  I believe that the IRS can go back 7 years.

Is there any advantages in incorporating yourself? Is it worth the trouble?

There are advantages and disadvantages to every type of legal/tax structure.  The difficulty is that sometimes what is good for a tax structure is not always the best for a legal structure.  Having said that though, the primary advantage to incorporating is for liability protection.  My guess is, as a piano teacher, the need for liability protection will not be paramount in your decisin making process.  Corporations have more stringent reporting requirements and you'll pay 2-4 times as much to have your tax returns done versus being what's called a Schedule C filer.  Corporations can have certain advantages for taxes, but you'll need to discuss this with a tax accountant to determine whether it would make a difference in your case.  There are two types of Corporations, S-Corporation and C-Corporation.  The tax treatement for each of these entities is different.

The most common tax strategy for running a business is called a Schedule C filer.  A Schedule C filer is what we generally think of when we think of people who are self-employed.  You don't need a separate bank account.  You don't need a separate tax return.  And, your record keeping and accounting systems don't have to be as detailed.  You simply claim your income and expenses on the Schedule C of your form 1040 tax return.  Any net income (i.e. gross income minus expenses) you make will be taxed for Self-employment tax (this is Social Security and Medicare) and it will also be taxed at whatever your marginal income tax rate is.

So, what you really need to answer are the following questions:
Do you need liability protection?
How much money do you expect to make from this endeavor (talking net income here)?
Do you want to, or are you going to, run a separate accounting system and bank account for your business?

My advice would be to talk to a qualified tax accountant.  Part of your interview process with them should include asking them about their experience in this type of business.  A good accountant can pay for themselves.

Jef

[Jacey1973]

These are deductible.  Keep track (yes, save these receipts) of these expenses:
--recital expenses
--music purchases that you are not reimbursed for by the student
--piano tuning and maintenance
--business/bookkeeping supplies (paperclips, paper, pens, etc.)
--postage
--advertising
--cost of printing notices, letters home, business cards, etc.
--professional magazines/periodicals
--professional organization fees or dues
--music and books you buy for your own continuing education

I had a talk about tax recently in one of the careers talks at my Uni. What Midwest says is deductible above, also applies to UK tax too.