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Songwriter Tax Tips
Performance royalties:
These payments come from your PRO for broadcast usages. In the US the payments would come from ASCAP
, BMI or SESAC.
In most cases these payments are subject to self-employment tax. A
songwriter acknowledges the income on Schedule C on their 1040 tax
return. A common cause of confusion is the term "royalties" and even
the IRS has mixed up, on occasion, the nature of songwriter performance
royalty income. In some cases the payments are not subject to self
employment tax. An example would be if you purchased the copyright
from the original songwriter. Another would be if you inherited the
income stream. In a nutshell, if you wrote the song, you pay
self-employment tax. If you did not write the song but somehow earn
the royalties, you do not. More confusion sneaks into the issue
concerning who owns the copyright. Even if a corporation publishes the
song and builds a strong income steam with it, someone, an individual
taxpayor, had to write that song. This prevents any business other
than a self employed individual from accepting the songwriters portion
of performance royalties from a PRO.
Synchronization royalties:
These payments come from the use of your music in film, television,
video, etc. The fees vary widely. In every case of a "sync" license
there are two copyrights being secured. One of them is for your song.
The other is for the master recording. The same logic applies to the
self-employment issue for sync payments. If a sync license results in
airplay then a performance royalty could be triggered as well, adding
to the income for the license. Some songwriters work with music
libraries. These companies are in the business of issuing sync
licenses full time. In many cases, the library assumes the publishing
portion of the song, while leaving the writers share with the
songwriter. Some libraries make a one time payment for the right to
issue sync licenses and do not share any further revenue with the
writer. Others do not make any payments but instead share direct
revenue earned with the writer for each sync license issued. Others,
like the big ones, make a one time payment and buy-out everything
including the writers portion of songwriter royalties. These companies
then issue sync licenses and enjoy 100% of all revenue the song
generates. We need to review your deals with these companies to
understand how to treat your revenue for tax purposes so make sure you
keep those documents.
Mechanical royalties:
These
payments come from the use of your song on master recordings that are
not synced to video or other media. They generally come from record
labels or artists that have recorded your song.
In the earlier years it is unlikely
that income will be generated, but as you build your catalog, you
should also build good records to substantiate not only the hard costs
of creating your catalog, but also the time it took to do so. We
suggest keeping a diary of the time you spend writing, meeting with
co-writers, attending seminars and the like. This will help in the
early years keep your songwriting business from being deemed a hobby.
Join as many songwriting organizations as you can stand to belong to
and log the time you spend on those activities as well.
Deductions:
The standard costs you write off as a musician apply to your
songwriting as well. The only big difference is demo and recording costs. If demo
costs are small, we can write it off in the year it was incurred,
however there is a rule that demo costs are supposed to be capitalized
and amortized over the revenue stream. There is a Safe Harbor election
that you can make to amortize those costs over a three-year period. You
get 50% of the demo cost in the first year, then 25% and 25% the
following years.
Research:
The cost of CD’s. videos, concerts,
cable, internet and the like can be written off as research, but as
with anything in tax, the burden of proof is on you. Log the time and
programs that you watch and CD’s that you are researching in your
songwriter diary just in case.
Another very important thing in
your songwriting life will be split sheets. These are documents that
state each writer, their share of the song, the publisher, engineer and
studio band. These split sheets may appear to have no significance at
first, but when your song lands as the new theme song to the Tonight
Show, believe me, that split sheet is worth your entire career.
The
business life of a successful songwriter is very complicated and often
involves the use of corporations to hold the publishing assets, a small
record label to produce master and demo recordings, a live performance
company and hopefully an investment portfolio to ensure these revenues
continue to earn money for the writer once the revenue streams slow.
Contact us to discuss your situation
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