If you earn more than $600 per year as a freelancer, contractor or sole proprietor, in the eyes of the IRS you are a sole proprietor. It’s a legal type of small business owner, and the most common type in the US. Yes, it comes with a lot of taxes (depending on where you live), but it also comes with a lot of perks! The exact type of deductions and write-offs you can legally claim can vary year to year as Uncle Sam makes annual changes. It’s always best to have a CPA on your side so you can ask questions throughout the year. A salsa instructor who makes a comfortable living may want to pay quarterly taxes instead of “just” annually, too, and a CPA can help you with this.
Before we dive into what you might be able to write off as a salsa instructor expense, let’s go over a few basics:
- Once you reach that $600 per year mark, you are legally required to pay federal and (if applicable) state taxes. As a sole proprietor, you have to pay double for Medicare and Social Security taxes since you are both the employer and employee.
- There are seven states where there are no income taxes. (More on this later).
- The IRS defines a sole proprietor as “someone who owns an unincorporated business by himself or herself.”
- Tax write-offs, credits, deductions, etc. can change annually.
- If you do not pay quarterly taxes, the IRS may charge you an interest penalty at the end of the tax year.
Finally, the most important note of all: US taxes can be complicated, intimidating and very confusing. Unfortunately, a lot of taxpayers—especially sole proprietors—pay more than they should because they don’t get every possible tax write-off they qualify for. It’s your job, and the job of your CPA, to make sure you don’t pay more than legally required. Here’s a cheat sheet to get you started.
What’s Up with the No Income Tax States?
Every state has its own income tax brackets, and some states do not require income taxes. These states include Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. If you live and work in these states (both are required), you don’t pay state income taxes. As an example, let’s say you have a choice to live in Oregon where income taxes are 10 percent for a specific bracket (amount you make), or in Washington state where there’s no income tax. If you make $30,000 per year as a salsa instructor/sole proprietor and live in Oregon, you owe the state $3,000 in addition to your federal taxes. However, if you live and work in Washington instead, you get to keep that $3,000.
As you can see, the more you make, the more state income taxes can make a huge difference! There’s also “foreign income exemption,” which is for US citizens living and working abroad at least 330 days per year. The US government has agreements with many countries so you don’t have to pay most federal or state taxes if you spend most of the tax year living and working abroad. You are still responsible for double those Medicare and Social Security taxes, though. Living and working abroad is a great way to save money for salsa instructors, particularly if you dream of teaching in a Latin country where salsa dancing is a way of life and cost of living is low.
Tell Me More About Write-Offs
You can legally write-off (or “deduct”) expenses that are directly related to your sole proprietorship. For salsa instructors, this can mean many expenses including studio space. The IRS is surprisingly very generous with write-offs for sole proprietors. However, should you get audited, you need to prove the purchase of supplies, space, travel expenses, etc. and how it relates to your business. Keep all receipts and a maintained spreadsheet for every year so that any potential audits can be well managed.
Whenever you make a purchase or pay a bill, ask yourself, “Is this 100 percent for my job as a salsa instructor?” If the answer is yes, it’s probably a tax write-off! (Consult with your CPA before making any major purchases to be sure). A few examples may include:
- A laptop, tablet or smartphone that’s used exclusively for salsa business. You cannot use any purchases for personal use, but you can purchase new equipment yearly without the IRS looking twice.
- Dance studio rentals.
- Salsa shoes and costumes for yourself as a teacher/paid performer, or to lend to paying clients.
- Stereo equipment used exclusively for teaching, hosted dance parties, or performances.
- Booking a live band for teaching or hosted dance parties.
- Travel (airfare, car rental, etc.) and hotel accommodations for salsa-related events such as conferences or festivals. You can also write off 50 percent of entertainment and food during such business-related travel.
- A portion of your mortgage/rent if you have an in-home office and/or studio space used exclusively for your sole proprietorship.
These are just a few of the most common examples. Everything from two dollars to park while meeting a client for an in-home private lesson to headshots for your professional website may be a tax write-off.
Any Bonus Tips?
When traveling for dance-related business, get creative. You can fully write off traveling (such as airfare), hotel fees during the actual days of the event, registration fees, parking on the days of the event, and half of food and entertainment within reason during the days of the event. However, you can also add on a personal vacation before or after an event, too! You will be totally responsible for all hotels, entertainment, food, etc. during your vacation days, but you can still write-off all of the original airfare and fees during “work days.” After all, you’d be paying the same ticket price whether you fly to Medellin for a three-day salsa conference, or if you decide to add on an extra week’s vacation at the end. It’s one of the biggest perks of being a sole proprietor!
Note: Always check with a CPA for complete tax advice.