No matter who you are, receiving a paycheck feels good. The amount doesn’t always matter because getting some income is better than getting no income at all.
Us common folk who have a job that pays every other week (and get our taxes taken out automatically) tend to be envious of the movie star who might work for a month on the summer’s hit blockbuster and walk away with a multimillion-dollar check. However, we tend to forget that we have one very important luxury that celebrities don’t stability. We know that the 1st and the 16th of every month, we will have a check for the same amount direct deposited into our bank accounts. Entertainers aren’t as lucky.
Whether you’re a well-known celebrity or an actor just starting an acting career in NYC and struggling to make ends meet, either party is not guaranteed a steady income.
Typically, entertainers receive their earnings after they complete a job or performance.
For purposes of this article, we’ll say that an up and coming actor in NYC receives two checks a year.
Sure, those checks may be for $150,000, but they may be received pre-tax. When you get a check for $150,000, your first inclination may be to spend it on some somewhat extravagant purchase. Take Nicolas Cage for example. In a relatively short period of time, he had a large influx of cash, so he went out and bought multiple new houses, a couple of yachts and even a private island. He overlooked the fact that he still needed to pay taxes on the money that he just spent. He wound up owing the IRS $13 million in taxes in which he failed to pay and blew almost all of his near $150 million fortune. Oops. If he had been a little more financially aware, he would have realized that he should be putting about half of his earnings away to go towards his quarterly estimated tax payments to the IRS.
Now, most of us aren’t lucky enough to receive checks with seven figures, or even five or six figures, but regardless of how much that check is amounted, entertainers need to be aware that in most cases, taxes have not been taken out of their earnings. In another post, we will expand more in detail about projections and estimated tax payments, but for now, plan on putting between 35% and 40% of your earnings away for tax payments, if tax is not being withheld for you. Unless you’re a super megastar like Nicolas Cage who brings in about $20 million a movie, in which case it’d be safer to put away an even higher percentage and even safer if you don’t buy yacht number five.
Along with not allocating a certain percentage of earnings towards your tax payments, entertainers tend to forget that their income fluctuates. The entertainment industry doesn’t usually allow you to receive that dependable check every other week that a majority of 9 to 5 workers receive.
Going back to our previous example, say the entertainer gets paid $150,000 in January. That entertainer then takes my great advice and puts about 40% of that amount aside to go towards tax payments. That leaves them with approximately $90,000 to last them until their next check comes in during July. If they are smart, then they will divide that by 6 to see the maximum amount they can spend per month while still living in their means until the next check comes in. But if they are even smarter, they realize that that next $150,000 check may not come; Stuff happens. Entertainers can get fired or the next movie they agreed to act in ends up never being filmed, which is why it’s so important to plan ahead.
Planning for the future is one thing that has gotten numerous big wigs in the entertainment industry in trouble. Famous stars such as R. Kelly, MC Hammer, and the aforementioned Nicolas Cage are prime examples. They got used to a large inflow of money and got accustomed to a certain lifestyle, and everything changed when they hit a dry period. It’s when you continue spending the same amount without bringing in a comparable amount that issues start to arise. To prevent this problem, you need to set aside a certain amount in each paycheck to invest. If you are investment inept like a majority of us are, it may be beneficial to hire an advisor or financial planner. Or in my case, if I am being too stingy to pay for an advisor, I can use my dad for advice and to invest my money how he seems fit. But regardless of who you use or how you invest your money, all that matters is that you’re doing it! If you do so, you will have nothing to worry about if you ever reach a lull in your career.
So remember to be smart with your money, live within your means and plan for and invest in your future.