[The "Can I Make a Living Doing What I Love?" Experiment is Pam Victor's one-year challenge to make a living through creative pursuits. Read all the updates here. ]
One of the happy side effects of devoting myself full-time to making a living through improvisation is connecting with other people on the same quest. Tracy Cubbal of Ohio is one of those supportive and generous people. She was kind enough to share her recommendations about the money-side of making a living in improvisation. As she says, she's not an accountant, so some of this information might not fit for you. Nevertheless, I thought perhaps it might be interesting to some of you, which is why I'm turning this post over to her. Thanks, Tracy! Take it away, girl ...
Tax Time for a Professional Improviser
By Guest Writer Tracy Cubbal
I started teaching improv classes in 2012, but 2014 was the first year my income approached more than pocket change and needed to be reported to the IRS. I’ve always done my own taxes, so instead of paying a professional to do them for me, I decided to do the copious amount of research that would allow me to do them
1. If you clear more than $400 from improv gigs in a calendar year, you are supposed to report it to the IRS on Schedule C. However, you will not receive a 1099-MISC from anyone who pays you unless you earn more than $600.
Schedule C requires you to report a Principal Business or Professional Activity Code. If your income comes mostly from performing, your category is Independent Artists, Writers, or Performers. If most of your income is from teaching, you fall under the umbrella of Educational Services.
2. Schedule C income sucks because it is taxed at a higher rate than W-2 (wage) income, the reason being that when you are an employee, your employer pays half of your Social Security and Medicare taxes. When you work for yourself, you are responsible for both halves. This is known as the Self-Employment Tax. (In 2014 this rate was 15.3%.) Then you have to pay ordinary income taxes on your adjusted gross income, which includes the net amount you earned from your business (although there is a deduction for half of the self-employment tax you paid -- Schedule SE walks you through this). Also note that if you expect to owe the IRS more than about $1000 in self-employment tax, you are supposed to pay it quarterly instead of all at once in April.
3. The good news is that any money you spend on improv (workshops, travel, teaching supplies, etc.) can be deducted from your taxable income, with the caveat being that you can only do this if your improv activities meet the definition of a business, as opposed to a hobby. This requirement is in place because if you lose money on your business, you can deduct those losses from the wages you make at your day job to reduce your overall tax burden. Therefore, high earners may deliberately try to lose money on a hobby and call it a business so they can evade taxes.
4. If you ever get audited, the IRS wants to know that you are serious about making money from improv, rather than just having fun with it. Fortunately, it isn't that hard to prove that your performing and teaching gigs constitute a business. You can prove you are a sole proprietor (that is the technical term) of an improv business if you earn more money than you lose three years out of five. (Technically, there is a way for the IRS to get around this, but they're not going to bother with the kind of money one earns from improv).
The other way you can prove that you run a business is if you operate "in a business-like manner." This is pretty much exactly what what it sounds like. Therefore, keeping records that support the proposition that you are trying to support yourself financially (even if it's only partially; you don't have to make enough to quit your day job) is of supreme importance. Keeping good records, printing business cards, maintaining a web site or a blog, and paying people to assist you would all be evidence that you are running a business.
5. Keep records of everything you earn and everything you spend on improv. When someone pays you in cash, give them a receipt, and keep a copy for yourself. When you pay for a workshop in cash, ask the instructor to sign a receipt for you. (I do both in one of those little carbon-copy receipt books you can pick up for $5 at an office supply store.) If you pay for a workshop via PayPal, print out the confirmation email. If an organization hires you to teach or perform for them, provide them with an invoice for your services (there are tons of free websites that you can use to do this). If you travel for an intensive or a festival, keep the receipt that shows how much you spent on transportation and lodging. Meals while traveling overnight for business purposes are partially deductible (50%).
6. Your risk of being audited increases somewhat when you have Schedule C income, but this is not something to be afraid of. Your risk is still pretty low, especially when you're not earning much. If you do get audited, chances are all you will have to do is photocopy your receipts and mail them in. Your deductions will be allowed as long as they are deemed "reasonable." What is reasonable? Well, I deducted the full cost of an immersion at Second City and workshops in Columbus and Detroit, my reasoning being that when I take a workshop, I immediately turn around and teach that material to my students. For my meal deduction, I used the GSA per diem rate rather than my actual meal expenses, because it's easier and more generous than what I actually spent on meals. (I checked, this is perfectly acceptable.) I also decided to deduct half the cost of the shows I saw. This is a little risky, because normally entertainment expenses are not deductible unless you are entertaining clients. If I ever get audited, I will make the argument that while I did derive some entertainment value from the shows, attending shows performed by professional improvisers provides an educational experience I couldn’t get any other way. I will show them the notes I took during these shows -- because who takes notes during a performance unless they are there to learn something? I absolutely believe I am a better teacher to my students because I am able to explain the difference between a Cook County Social Club and a Bassprov show.
I once heard a tax professional say that you should keep your total deductions under half of what you earn for the year. If I were to spend as much money on improv as I earned from it, I think it would be easier for the IRS to make the argument that my improv business is actually a hobby. Half of one’s earnings is kind of a lot to spend on expenses, but I can assert that I am in the process of growing my business and that these are reasonable start-up costs.
Tracy Cubbal's improv team performs
in Cuyahoga Falls, OH
7. There are two accounting methods for keeping track of business expenses and income, cash and accrual. Most small businesses use the cash method, as it is much simpler. You don't need to know anything more about this except that I got kind of screwed this year because I taught a class in November but didn't get paid until January. If I'd been paid in 2013 I could have used that year's expenses to offset the income. Instead it goes on this year's return and increases my tax burden. I could get around this by using the accrual method instead of the cash method, but that would be a huge pain. So, make sure you get paid before the end of the year unless you want the income to go on the following year's return.
When I was 13 years old, I dreamed of being a professional actor. I abandoned that dream early on when self-doubt took over. Many years later, I rediscovered my love of being on stage through improv. I hope someday to support myself through teaching and consulting. Perhaps that is an impractical dream. But in my book, earning enough income from working in the performing arts that I have to report it to the IRS qualifies me as “a professional.” I would love to go back in time and whisper to my 13-year-old self, “You did it!”
Tracy Cubbal has been a fixture of the Cleveland improv scene since 2005. She has studied at the Annoyance, iO, and Second City. She has performed at the Big-Little Comedy Fest, the Columbus Unscripted Improv Festival, and the Del Close Marathon. Tracy does short form with Point of NoReturn Improv in Cuyahoga Falls, OH and spent several years doing long form with Angry Ladies of Improv. Her latest undertaking is an exploration of the Harold with long form team Dennis! She co-organizes Cleveland's open improv jam. Tracy holds a master’s degree in industrial-organizational psychology. Tracy's website is www.tracycubbal.com.
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