Taxation of Unemployment Benefits for Musicians

Taxation of Unemployment Benefits for Musicians

On March 11, the President signed the American Rescue Plan Act (ARPA), which changed the taxation of unemployment benefits. Many musicians received unemployment benefits in 2020 due to Coronavirus shutdowns. Unemployment benefits have always taxable income, however, ARPA will allow you to exclude up to $10,200 of benefits from your 2020 income.

Musicians can qualify for this $10,200 exclusion as long as your modified adjusted gross income is below $150,000. The $150,000 earnings limit does not include amounts received as unemployment benefits. For married couples, each spouse qualifies for a $10,200 exclusion, if both received unemployment benefits. Benefits over $10,200 are still taxable income.

This change came well into tax season and many musicians had already filed their tax returns. The IRS says you do not need to file an amended return. The IRS will automatically issue a refund. Not sure if your tax return is correct? Check Schedule 1, line 7 and line 8. Line 7 should list your unemployment benefits received. On correct returns, line 8 should show “UCE” for Unemployment Compensation Exclusion and have a negative number, in parenthesis.

Should You Amend?

While the IRS will send you a refund if your return did not include the ARPA’s Unemployment Compensation Exclusion, you may want to start over. Why? If you reduce your taxable income by $10,200 or $20,400 (joint), you may discover that you are now eligible for additional tax credits, such as the Earned Income Tax Credit or the Saver’s Tax Credit. The IRS will recalculate these, if you already had them on your return. However, they will not determine your eligibility. So, if you did file your taxes before ARPA, you may want to check if you might now be eligible for any additional tax savings.

While the majority of taxpayers should not need to amend, there will be many musicians who could leave money on the table if they do not recalculate their return. If you recalculate and all the changes stem from Schedule 1, line 8, then you do not need to amend. If you have additional tax savings, or new tax credits apply due to the lower income levels, you may want to amend.

This has been quite a messy tax season for tax preparers, with changes happening in the middle of March. Do you pay state income tax? States are considering if they should match the Federal change on the taxation of Unemployment. Arkansas, for example, decided to exclude Unemployment from State Income Tax for 2020 and 2021. Some states are still in the process of changing their 2020 tax forms! Maryland is so slow to revise their instructions, they had push their state deadline to July 15.

Read more: Kiplinger’s State by State Guide to Taxation of Unemployment Benefits

2020 Tax Deadlines

If you have not filed your return, you have until May 18 this year. Residents of Texas, Oklahoma, and Louisiana have until June 15 due to the Federal Disaster Declaration from the winter storms. However, please note that if you file quarterly estimated tax payments for 2021, the deadline remains April 15 for the first quarter.

The ARPA exclusion of Unemployment Benefits only applied to 2020. At this point, there are no plans for the Federal exclusion to be carried forward to 2021. So, I would anticipate that any unemployment benefits in 2021 will be taxable. Taxes can certainly be a headache for musicians, but we can help. In our financial planning process, we address the major areas of your financial life, including Tax Strategies, Retirement Planning, Cash Flow and Budgeting, Risk Management, and Investing. We are accepting new clients and would be happy to discuss our services and how they may work for you. Here are 10 Questions to Ask a Financial Advisor and my answers, if you’d like to learn more.

Unemployment Benefits for Musicians

Unemployment Benefits for Musicians

With the Coronavirus causing cancellations of concerts, schools, church services, and other gigs, many of you are wondering about unemployment benefits for musicians. Are you eligible?

Unemployment insurance is provided at the state level and each state has its own eligibility, rules, and application process. To find the link for your own state, visit the US Department of Labor website here. This site includes any new rules or benefits offered because of the COVID-19 crisis.

If you are a W-2 musician (an “employee”) you are generally eligible for benefits if you have lost work due to Coronavirus. You don’t have to be a full-time employee or work exclusively for just one employer. Even if your lay-off is temporary, and you are not permanently “fired”, you may still be eligible for benefits. Please check your state rules and verify before assuming you aren’t eligible. And know that filing for benefits doesn’t cost your employer. They already paid premiums to the state for this insurance.

Here in Texas, the state will need your past five quarters of earnings and will base your benefit on the first 4 of 5 quarters. Benefits range from $69 to $521 a week, depending on your past wages. You should apply as soon as possible to avoid missing any weeks of benefits. There is often a lag of three or so weeks until you receive your first payment.

Self-Employed?

The bigger challenge for musicians is that many of us are 1099 or “Independent Contractors”. If you are self-employed, you are generally not going to be eligible for unemployment benefits. Minnesota offers benefits to the self-employed, but only if you paid into the program in advance. So, you need to check your own state rules to verify.

This brings up an important point. Many ensembles incorrectly classify musicians as Independent Contractors, when they should be Employees. Some musicians point out that they have more tax deductions as an Independent Contractor. That’s true. However, you miss out on two big advantages as a Employee. First is Unemployment Benefits, which you don’t get as a 1099. Second is that an employer has to pay 7.65% towards your Social Security and Medicare taxes. This cuts in half the Self-Employment tax that you would pay as a 1099. That’s like a 7.65% raise by going from 1099 to W-2.

The Lancaster Symphony Case set a legal precedent that orchestra musicians are employees. It’s time for orchestras to stop classifying musicians as Independent Contractors. That would allow more Unemployment Benefits for working musicians.

Stay healthy. I hope this will pass soon so we can all get back to performing, teaching, and sharing our love of music. Don’t be afraid to ask about Unemployment Benefits for Musicians. Yes, it can be a pain to apply and meet all the ongoing eligibility requirements. But if you are out of work, don’t delay in getting the benefits you deserve.

UPDATE April 3, 2020: The CARES Act passed last week is expanding Federal unemployment coverage to include self-employed individuals. While this benefit is supposedly available immediately, the states are still working on how to actually do this. Here in Texas, there are presently no instructions or process to apply for unemployment benefits for self-employed, “gig economy” workers. But this should be available soon. We will have to see how they will calculate your income and benefits, it will be interesting!