Taxes - Getting Started in the Music Business

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Do we pay taxes on the band's income?

Yes, the income earned by a band or solo musician is taxable. If you are a sole proprietor, you can use your own social security number and tax return to report your income and losses. Band members must get their business entity an "employer identification number" (EIN), which is like a Social Security number. The EIN works the same way for your business, and federal law requires all partnerships and corporations to use an EIN. Keep track of the group's income, expenses and losses. Once you have your EIN, you can report your taxes properly.

To obtain an EIN, contact the Internal Revenue Service and request form SS-4. You may complete the form online at http://www.irs.gov/businesses/small/article/0,,id=102767,00.html or send it by mail.

Order the form, a Business Tax Kit and/or other tax publications by calling (800) 829-3676, or write to:

Internal Revenue Service
300 East 8th Street, Room 478
Austin, Texas 78701

What tax procedures do we follow?

Your tax obligations will depend on the type of business you create. Sole proprietors report their business income on their personal tax returns, but they follow the small business accounting and reporting procedures. Sole proprietors may be required to pre-pay quarterly taxes based on an estimate of what they expect to earn, and they pay a self-employment tax which goes into the Social Security pool.

Partnership taxation is not very complicated because the partnership itself does not pay taxes. Instead, the individual members pay the taxes for the partnership's income on their own individual tax returns. This method is called "pass-through tax treatment", because the business profits and losses are "passed on" to the partnership members. The partnership entity files a "Federal Partnership Return of Income Form 1065". This is an informational form on which you declare each member's "distributive share" of the income or losses incurred by the partnership that year. Each member then reports his distributive share along with his personal tax return. Even if you think the band will probably lose money in the first few years, keep track of the losses and report them on the Form 1065. Ask your accountant or attorney if each band member can claim his share of the losses to offset taxable income from your day jobs. If you are eligible to claim the losses, you can use them to save money that you would otherwise pay in income tax.

Corporate taxation is too complex for the scope of this discussion, but you should understand the basic difference between partnership taxation and corporate taxation before you decide whether to incorporate your band's business. In a corporation, profits are taxed at both the corporate and the shareholder levels: the corporation pays taxes on its earnings, and then the shareholders are taxed on the dividends they receive. This system of "double taxation" may end up costing more tax dollars than the pass-through system for partnerships. Talk to an attorney or accountant about tax options and strategies for corporations before you decide whether incorporating is a useful move at your current career stage.

What tax forms should we use?

Each business type requires different tax reporting procedures. Consult an accountant, and research the state and federal tax laws for small businesses. There are no state income taxes in Texas, so you need only follow the federal tax procedures for your reported income.

The IRS produces a library of booklet-sized publications on business tax topics and distributes them free of charge. The publications cover all of the forms and tax regulations in detail, including accounting procedures, deduction categories, sample returns and so on. The list below will get you started, and check the IRS website for the whole library of topics. You may download these materials and all tax forms from the IRS business information web pages at http://www.irs.ustreas.gov/formspubs/index.html, or call (800) 829-3676 to request the materials:

• Publication #334, "Tax Guide For Small Businesses"

• Publication #541, "Partnerships"

• Publication #542, "Corporations"

• Publication #535, "Business Expenses"

• Publication #583, "Starting a Business and Keeping Records"

Do we have to pay sales tax on merchandise we sell at gigs?

Yes. Texas law requires that you collect and pay sales tax on merchandise sold off the bandstand. Apply for a "Retail Sales Tax Permit" with the Comptroller of Public Accounts in your area. Check the blue pages for the office closest to you, or call (800) 252-5555 for information.

You are required to pay the collected retail tax either annually or bi-annually, depending on your volume of sales. The current Texas sales tax is at .0625%, or 6.25 cents per dollar. Some cities charge an extra sales tax of up to 2 cents on top of the state retail tax rate. In Austin, the total sales tax is .0825%, so for every 10 dollar CD or T-shirt that you sell off the bandstand, you owe the Comptroller 82.5 cents. Keep a record of your sales volume, and put this money in a separate savings account for the band so it will be available when due.