Starting a Profitable Music Studio

Many professional musicians find teaching to be personally fulfilling and an important part of their annual income. Sharing your love of music with someone else is incredibly rewarding and a way of giving back for the great teachers who inspired us to follow our own path.

Teaching the content is easy, but I think many of us struggle with the business, marketing, and organizational aspects of being a self-employed private lesson teacher. That’s why I reached out to Andrea Miller, founder of MusicStudioStartup.com, for advice. I’ve learned from reading her posts and think many musicians would benefit from subscribing to her newsletter, whether you are starting a studio for the first time or have been teaching for decades. Here’s our conversation:

Finance For Musicians (FFM): I’ve really enjoyed reading your posts on starting and running a music studio. You’ve got a unique story, please tell us about your background as a musician, piano teacher, and in business. How did this all come together?

Andrea Miller (AM): My interest in entrepreneurship developed long before my interest in music! I was always starting businesses as a kid. I started piano lessons when I was seven and started teaching in high school. That’s also about the time I decided the first business I would start after college would be a music school.

I paid my way through a double-major in Entrepreneurship and Piano Performance by teaching and running a house-painting business. My senior year was an especially busy one. When I wasn’t practicing for my senior recital, I was wrestling with my music school business plan, trying to find a way to make it work without having to go into major debt.

There was always a tension in college between the music and business worlds. The two finally collided when I had to reschedule my senior recital at the last minute because I was invited to compete in a national business plan competition the same weekend.

I launched my music school a few months after graduation and hired my first teacher that same year. Soon we had over 100 students and five teachers in our thriving community. Four years into growing the music school, a move to the East Coast led me to pass the music school off to a new owner and revise my entrepreneurial path.

I opened a home studio in my new town and began consulting for startups and business owners in a variety of industries. In 2016, I decided to bring my entrepreneurial focus back to the music world full-time. Today, I coach ambitious music teachers who want to accomplish big things in their careers!

FFM: Musicians are certainly taught how to be great performers and teachers, but most schools aren’t preparing their students for the business side of music, such as having your own private studio. What do you find are the biggest initial challenges facing someone who wants to start a studio? 

AM: Unfortunately, I think many fantastic teachers start off on an unsustainable path by under-pricing their services. They don’t have a clear picture of their long-term financial goals and responsibilities or are afraid to charge what they need to to make it work.

FFM: A lot of musicians resent the idea that we have to market and “sell” ourselves. As artists, it seems maybe a bit degrading, or at the very least, it’s uncomfortable. How can musicians open themselves up to think more like an entrepreneur and embrace marketing? For creative people, why does this seem so difficult?

AM: I encourage musicians to think about why they’re uncomfortable with marketing.

Afraid of coming across as “salesy?” Look for a promotional style that fits your personality. Timid about putting yourself out there? Make mini goals each week to practice and grow in this area. (It’s kind of like learning a new instrument!)

FFM: If someone is new to a town, what would you suggest for them to get established as quickly as possible? If you are trying to pay your bills, you can’t exactly wait three years to get your studio up and running. 

AM: Set up a website and get involved in your neighborhood. Actively participate in community events and introduce yourself to the local play group organizers and school music teachers.

FFM: As teachers get more students, the administrative tasks outside of lesson time can become quite time consuming, with scheduling, billing, and communicating with parents. I know some teachers get really burned out on this part of being a self-employed teacher. Any suggestions for this, maybe tools or apps that help a teacher save time and be better organized?

AM: I love a good system! Use an automated system for billing so you never have to worry about not getting paid on time because you forgot to send the invoices.

Write canned email responses for new student inquiries so you can respond quickly and don’t waste time writing the same email over and over.

Establish routines for important tasks that you have to do manually (every Saturday morning I spend about 15 minutes processing receipts and doing my bookkeeping).

Schedule time to zoom out from the day-to-day tasks and establish long-term goals (Ex. If the admin side really isn’t your forte, what would it take to hire an assistant or outsource one particularly arduous task?).

FFM: You’ve got a lot of great resources on your website and you also coach people to start, grow, and better manage their studio. Tell me about what you do for your clients and who would benefit the most from your services. What sorts of concerns can you help teachers address and solve?

AM: We cover a lot of topics in coaching, but ultimately I help teachers build financially-viable studios faster. Most teachers don’t realize that running an unsustainable studio when they’re young can have huge long-term costs.

Right now, if a 25 year old teacher decides to max out his Roth IRA this year only, his $5,500 investment will be worth about $82,000 when he retires. If he waits until he’s 30, he loses five years of potential investing and his $5,500 investment is only worth about $59,000 when he retires. If he waits until 35 the value of that $5,500 investment drops to $42,000.

The ramifications of building a sustainable studio early on are huge!

FFM: There’s no substitute for getting an early start on saving, so thank you for pointing out how important that is! What qualities do you think are most important to be a successful lesson teacher?

AM: From a teaching perspective, you have to actually care about the students. If you don’t care about them, they won’t care about what you have to say.

From a business perspective, I think focus is one of the most important qualities. There will always be more things to do than you have time for and you have to be able to look past the distractions to work on the important things.

FFM: Suggested book or resource for studio teachers?

AM: The Power of Habit by Charles Duhigg

FFM: I think most teachers have had teachers who inspired them. Would you like to give a shout out to any people who made a big impact on your life?

AM: I’ve had three teachers who each inspired me in different ways. My first teacher taught me how to motivate and inspire students. My second teacher taught me how to foster a love of music in my students. My third teacher taught me how to coach students to reach a higher level of musical mastery. I’m thankful for all of their influences!

FFM: Thanks for your insights! Where can readers connect with you?

AM: Thank you, it’s been a pleasure. My site is MusicStudioStartup.com. I’m on Instagram @musicstudiostartup, Facebook: https://www.facebook.com/musicstudiostartup, and (soon) on the podcast!

Estimated Tax Payments For Musicians

The IRS requires that tax payers make timely tax payments, which for many self-employed musicians, including 1099s, means having to make quarterly estimated tax payments throughout the year. Otherwise, you could be subject to penalties for the underpayment of taxes, even if you pay the whole sum in April. The rules for underpayment apply to all taxpayers, but if you are a W-2 employee, you could just adjust your payroll withholding and not need to make quarterly payments.

If your tax liability is more than $1,000 for the year, the IRS will consider you to have underpaid if the taxes withheld during the year are less than the smaller of:

1. 90% of your total taxes dues (including self-employment taxes, capital gains, etc.), OR
2. 100% of the previous year’s taxes paid.

However, for musicians with an adjusted gross income over $150,000 (or $75,000 if married filing separately), the threshold for #2 is 110% of the previous year’s taxes. Additionally, the IRS considers this on a quarterly basis: 22.5% per quarter for #1, and 25% per quarter for #2, or 27.5% if your income exceeds $150,000.

Many self-employed musicians will find it sufficient to make four equal payments throughout the year. If that’s the case, your deadlines are generally April 15, June 15, September 15, and January 15. However, if your income varies substantially from quarter to quarter, or if your actual income ends up being lower than the previous year, you may want to adjust your quarterly estimated payments to reflect those changes.

You can estimate your quarterly tax payments using IRS form 1040-ES. Of course, your CPA or tax software should automatically be letting you know if you need to make estimated tax payments for the following year. You can mail in a check each quarter, or you may find it more convenient to make the payment electronically, via IRS.gov/payments.  For full information on quarterly estimated payments, see IRS Publication 505 Tax Withholding and Estimated Tax.

Estimated payments will fulfill the requirement of 100% of last years payment, or 90% of this year’s payment if that figure is lower. However, estimated payments are not designed to cover 100% of the current tax bill, so if your income is significantly higher this year, you could potentially owe a lot of taxes in April even after making quarterly estimated payments.

If you’re a self-employed musician, you don’t need to be a tax expert, but you do need to understand some basics and to make sure you are getting good advice. When you aren’t being paid as a W-2 employee, it is up to you to make sure you are setting money aside and making those tax payments throughout the year, so that next April you aren’t facing penalties on top of having a large, unexpected tax bill.

Bonus Depreciation for Self-Employed Musicians

We’ve written extensively about the loss of tax deductions for W-2 musicians under the new Tax Cuts and Jobs Act (TCJA). For self-employed musicians, however, there are some changes for 2018 which may benefit you if you are an Independent Contractor (1099), Sole Proprietor, or have formed an LLC or Corporation. Specifically, Section 179 has been expanded, which enables business owners to expense certain items (take an immediate tax deduction) instead of depreciating those purchases over a longer number of years.

Section 179 has existed for many years, but Congress has continually changed the rules, setting caps on how much you can deduct. At the start of 2017, you could only take bonus depreciation of up to 50%. Under the TCJA, for 2018, bonus depreciation is increased to 100%, the cap increased from $520,000 to $1 million, and now you can also purchase used equipment and receive bonus depreciation.

As a self-employed musician, Section 179 can help you deduct:

  • Equipment for the business, such as musical instruments, sound gear, or accessories
  • Office furniture and office equipment
  • Computers and off the shelf software
  • Business vehicles with a Gross Vehicle Weight Rating (GVWR) of over 6000 pounds

You cannot use Section 179 to deduct the costs of real estate (land, buildings, or improvements), for passenger cars or vehicles under 6000 GVWR, or for property used outside of the United States.

One of the most attractive benefits of Section 179 is the ability to deduct a vehicle for your business. Under Section 179, your first year deduction on a 6000 GVWR vehicle is limited to $25,000. You would first deduct this amount. Second, you are eligible for Bonus Depreciation, which used to be 50%, but now is 100%. That means that a self-employed musician can effectively deduct 100% of any qualifying vehicle in 2018, even if it is a $95,000 Range Rover.

To be deductible, you must use the vehicle for business at least 51% of the time. If you also use the vehicle for personal use, you may only deduct the portion of your expenses attributable to the percentage of business miles. The way to maximize your Section 179 deduction, is to use the vehicle 100% of the time for your business. If the IRS sees you claim 100% business miles on your tax return, you had better have another vehicle for personal use. You might use your spouse’s vehicle, or perhaps keep your old vehicle, for personal miles.

Don’t forget that commuting between home and the office are considered personal miles, not business miles. This works best if your primary office is at home and all of your concerts, gigs, or teaching, are self-employed or 1099. If you are self-employed, then any driving to rehearsals, performances, teaching, business meetings, auditions, etc., would be business miles.

The 6000 pound GVWR requirement doesn’t mean that the vehicle literally weighs over 6000 pounds, but has a total load rating (vehicle, passengers, cargo) over this weight. If a manufacturer lists the weight of the vehicle, that is not the GVWR; the GVWR is often 1500 or more pounds higher than the vehicle weight. Make sure you are looking specifically at the official GVWR. You can generally find the GVWR printed on a sticker in the driver’s door frame to confirm.

The list of qualifying vehicles varies from year to year and from model to model, but includes most full-size trucks, vans, and SUVs. Be careful – sometimes a 4WD model is over 6000, but the 2WD version is not. On one SUV, a model with 3rd row seating was over 6000, but without the extra seats, it was under 6000. An another SUV, 2016 models were over 6000 GVWR, but the new and lighter 2017 model was not.

There are many lists on the internet of which vehicles qualify; in addition to full-size pick-up trucks and vans, most large SUVs such as a Tahoe, Suburban, Expedition, or Escalade are also above 6000 GVWR. Several mini-vans qualify (Honda Odyssey, Dodge Grand Caravan), as do some more medium size SUVs (Jeep Grand Cherokee, Toyota 4Runner, Audi Q7, BMW X5, Ford Explorer). Again, be absolutely certain your vehicle will qualify before making a purchase. One of the nice things about the new law is that now you do not need to buy a new vehicle to qualify for bonus depreciation; used vehicles are also eligible.

Please discuss this with your tax preparer. You cannot deduct more than you earned, so don’t buy a $50,000 SUV if you only show $30,000 in net profits. Similarly, you might be able to now deduct a $100,000 violin, but if you don’t have $100,000 in self-employment income, you might be better off depreciating the instrument over several years. Lastly, consider these caveats:

  • You have a choice between taking the “standard mileage rate” of 54.5 cent/mile for 2018, or using the “actual cost” method. When you take the standard rate, that already includes depreciation. If you use Section 179 to purchase a vehicle, you are going to be locked in to using “actual costs” for the life of that vehicle. You cannot take the Section 179 deduction upfront and later switch the standard mileage rate.
  • If you are using “actual costs”, you can also deduct your other operating expenses such as gasoline, oil changes, maintenance/repairs, insurance, tolls, and parking, but will need to document your costs. Keep those receipts!
  • You may still be required to keep a mileage log (“contemporaneous record” in IRS terms) to prove you are using the vehicle for more than 50% business miles. If business use falls below 50%, you may be required to pay back some of the depreciation. Let’s just say that would be expensive and a headache.
  • If you depreciate 100% of the cost of the vehicle upfront, that will reduce your cost basis to zero. When you sell the vehicle, you may be creating a taxable gain.
  • You may be able to finance a vehicle and still claim an upfront deduction under the Section 179 rules.

Under the TCJA, these expansions to Section 179 are temporary through 2022; after that time, bonus depreciation will be phased back down from 100% to 0%. So if you want to buy an SUV or truck, you have a five-year window to take advantage of this full depreciation.

This tax deduction is especially effective if you have a banner year of high income and anticipate being in a higher tax bracket, because it will let you accelerate future depreciation on a vehicle into the current year, provided the vehicle is purchased and placed into service that year. Please remember that this section 179 deduction is available only to the self-employed and not to W-2 employees.

I feel I should point out that driving a large SUV or truck may not always be the most cost effective decision. I am not suggesting everyone rush out and buy a Suburban just to get a tax deduction. But if you were thinking about buying a vehicle this year, it can certainly help to know about this tax deduction. And it might influence which vehicle you choose to buy!

I see a lot of musicians who keep good records and find out after the fact which expenses they can deduct. But I don’t see a lot of musicians who are proactively making business decisions to maximize their economic benefit. If you’re going to need a vehicle to haul your drums, or harp, amps, or even just yourself, why not choose one where you can potentially deduct the full cost of the vehicle? With the high costs of operation, insurance, and depreciation of any vehicle, I think there are a lot of musicians who would benefit from an actual cost approach, rather than tracking miles using the standard mileage rate. If your musical life involves a lot of windshield time, know your options.

Self Employed? Discover the SEP-IRA.

The SEP-IRA is a terrific accumulation tool for workers who are self-employed, have a family business, or who have earnings as a 1099 Independent Contractor. SEP stands for Simplified Employee Pension, but the account functions similar to a Traditional IRA. Money is contributed on a pre-tax basis, and then withdrawals in retirement are taxable. Distributions taken before age 59 1/2 may be subject to a 10% penalty.