Should I teach guitar lessons "under the table" or create a legitimate business?
October 23, 2012 1:00 AM   Subscribe

Should I teach guitar lessons "under the table" or create a legitimate business?

So I used to teach guitar lessons in a studio, but I have since left this studio because I got another job.

I am planning to teach lessons privately, from my home.

Currently, I charge $25 per 30-minute lesson. I'm not yet sure how many students I will end up with.

The way I see it, I could go one of two ways with this. I could either advertise on Craigslist and teach "under the table," and not declare anything when tax time rolls around...

Or I could make my own website, register as a legitimate business and then write off all my supplies.

A couple of questions for any accountant types out there...

1. Which of the two ways would make more financial sense, under-the-table or legit business?

2. Assuming I go the legit route, exactly what would I be able to write off? Obviously method books, printer paper, etc. But how far can I go with the write-offs? For instance, if I decide to teach lessons via Skype, could I write off the cost of a computer?

Could I write off my cell phone? What about guitars? :)

Would I be able to write off my own lessons with my teacher?

These may be dumb questions, I don't know much about this stuff.

Thanks in advance everyone!
posted by Eradicator! to Work & Money (8 answers total) 3 users marked this as a favorite
Best answer: My daughter's violin teacher has just gone through the same thing.

She started off "under the table" taking only cash until she built up enough students and enough CASH-FLOW to start properly paying taxes. (I do not endorse this - not paying taxes is stealing from your neighbors.) She has just started a proper business and next month will make her first payroll and her first payment of withholding tax. She sold her (very expensive) violin to her business - which became a write-off for her business and non-wage income for her.

I capitalise CASH FLOW above because you ask about write-offs and this should be your second concern. Cash-flow, money coming in and money going out, is the be-all and end-all of small business. You have to be able to pay your bills, your taxes, and last, but hardly least, yourself on a monthly basis or you're working for free and working for free sucks even when you are your own boss.

Ideally, you would do this on the side, pay your payroll and business taxes from the very start and when you have enough business quit your full-time gig and become a full-time guitar instructor.
posted by three blind mice at 1:43 AM on October 23, 2012 [1 favorite]

For what it's worth, it is legal (albeit strongly discouraged) to not file an income tax return if you earn less than a IRS-defined threshold.

If you earn more than that, no one here can advise you to not declare your income, as that would violate US law.

If you are planning to make this a "real job", you are going to have to do it properly at some point. If you can't do it at the beginning, there is no reason to believe that you will be able to do so in the future.
posted by saeculorum at 7:03 AM on October 23, 2012 [1 favorite]

Best answer: As a previous teacher myself, all of my friends at one point were (or still are) in the position you are in. Just do it right from the beginning. Even if you have one student, because one day you will find a bunch of students knocking at your door, and you won't have the time or energy to set it up correctly at that point.

You can still advertise via Craigslist, by the way. Forget a website for what you are doing. Craigslist all the way. (And maybe teacher co-op sites, too.)
posted by TinWhistle at 7:08 AM on October 23, 2012

Best answer: register as a legitimate business

This isn't actually a necessary step; if you make income without incorporating you're a sole proprietor (i.e freelancer). You should talk to an accountant about how best to track and declare your income -- presumably your students aren't going to be sending you 1099 forms -- but you should definitely plan on paying taxes and keep proper records and so on. You'll need those records in future years.

Things you can deduct include any expenses directly related to your business. So, yes, your computer, your guitars, your lessons. Also any music you buy, any concerts you go to. If you're teaching out of your home there's a home office deduction. If you drive to your students homes there's a mileage deduction. Probably the biggest and most important one is your health insurance.

The catch is that in order to take all these deductions you have to be able to prove that you've made a profit during at least three of the past five years -- otherwise they classify it as a hobby rather than as a business. I'm not sure of the implications of this for new businesses.

TL;DR: talk to an accountant.
posted by ook at 8:16 AM on October 23, 2012

Speaking as a side-business owner myself, you should definitely keep proper records and pay your income tax like a citizen instead of sneaking about and acting like a stinking thief. Like TinWhistle says, do it right from the beginning because you will not have the time and energy to deal with incorporating (if that's what you decide to do), buying or creating your business records software, and finding a tax expert once you get busy with your many eager customers. And you can hold your head up with pride knowing you contributed to your community in a meaningful way.
posted by BigLankyBastard at 8:18 AM on October 23, 2012 [1 favorite]

On a slightly related note, when I worked in retail banking, if you wanted to open a business checking account and were a sole proprietor, if the business name contained your entire name (EG: Eradicator! Smith's Guitar Lessons) you didn't need any other documentation other than what you needed for a personal account. You can add a DBA (Doing Business As) later on if you want to change the name so you're not stuck with it forever.

Business account documentation requirements can vary bank-to-bank and state-to-state but sole proprietors generally don't need much.

As far as taxes, I think you need to look at it this way. If you end up having a lot of students and lots of revenue, it's going to be very hard to hide that income and you're basically stealing. If you never have more than a few students and not much revenue, it won't really affect your tax picture that much.

Do it right from the beginning.
posted by VTX at 8:52 AM on October 23, 2012

Best answer: Agreed with previous posters. You don't have to make a big deal of "starting a business". Tax filing is very separate from naming your business, filing LLC paperwork, having a swank website, passing out business cards at events, having 30 vs 2 students, etc.

Especially with being a casual semi-professional musician, your best route is to start a spreadsheet and write down everything that could possibly be connected with your life as a musician. This means every gig you play (note income, and if you're being thorough also mileage and any food/drink purchased can be written off but it's safe to ignore food/drink comped), and every lesson you teach, as well as every lesson or workshop you pay for, every concert you attend (mileage again!) and CD you buy (though you might want to not count music that's unrelated to the style you play). Of course all your materials (new strings, instruments, stands, cases, cables, amps, batteries, etc) as well. If you want, go ahead and note down things you own, which you use a lot for your work - if you have a dedicated studio room you can write off rent/mortgage, if you use the computer almost exclusively for music stuff, etc.

I have a salary from my day job, but play music for fun and profit. Over the last 15 years I've filed a Schedule C for that income about 5 times, during a period when I was most active, with a band regularly, etc. These days, it's not so important, but I still keep track of things (roughly at least) just in case. At the beginning of any given year, I never know whether I'll have only a handful of $50 gigs all year long, or if in August I'll do a big project end up looking at $3000 for the year. So, I start in January keeping track of things as if it's going to matter. In reality I usually bring in only $1000 or so, it doesn't take so many concerts/CDs/splurges to cancel that out. Usually the total is around $200 net, and I'm not even meticulous about the smaller expenses; I save info in an excel document, and don't bother filing a Schedule C (small business income) with my taxes. If the IRS wants to come after me sometime in the future, I'll fill out the forms then, and give them their N% of that $200, but it's my personal choice that it's not worth the trouble to file it now. However, it's also my personal choice to keep track of these things so that I know it's not worth the trouble. And if I suddenly some August become a more active musician than I am now and the income is large enough that I need to fill out the Schedule C, or if I get to the end of the year and some bar I played at sends me a 1099, then I'll have the necessary documentation to just file the taxes and be done with it.

That said, if this is your only income, then you should file taxes for it, even if your profit/loss works out to almost a wash. I can get away with ignoring the taxes most years because it's basically a not-losing-money-hobby and I clearly have another job I'm paying taxes on; but if you have no income at all, the IRS will probably start asking questions.
posted by aimedwander at 11:35 AM on October 23, 2012

Response by poster: Thank you all for the informative posts!

I should have mentioned that I am planning to keep my other job (mostly because of the health benefits). So I will be a part-time guitar teacher.

Thanks to aimedwander for pointing out the difference between a small business and "starting a business," I think maybe I have been overthinking this instead of taking a more simple approach.

Ook brought up the "must show a profit within three years" rule, which I have read about.
With this rule in mind, and considering what three blind mice said about cash flow, is it a good idea that I am more conservative as to what I write off in the first three years?

For instance, write off the cost of my computer, but maybe not the little things (printer paper, ink, etc) until I get enough students to balance out the cash flow and ensure that I am making enough profit to warrant the write-offs? Or should I just write off every expense related to it, and hope for the best?
posted by Eradicator! at 5:00 AM on October 31, 2012

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