WHETHER YOU’RE PLAYING AT LOCAL CLUBS OR TOURING THE REGION, NATION, OR BEYOND, paying the professionals who help you along the way is part of the cost of doing business. But what are the best practices to implement when paying those people? Here is a quick list for setting up your band’s business and payment plans, with some legal considerations along the way: Band Banking:
1) Set Up Your Business: To get a business bank account, your best bet is to establish a formal company – which is not as complicated as you might think. The most popular entity for bands is the Limited Liability Company, often used because they are less complicated to maintain and provide liability protection against you personally. An LLC is coupled with tax advantages less formal than corporations. LLC requirements vary from state to state, but can often be filed online at the Secretary of State website. To check out options for forming an LLC where you live, go to www.nolo.com, search “LLC” and click on your state.
2) Get an Account: To set up a business bank account, you’ll need a Federal Identification Number (like a Social Security Number, but for your business), which is easy to do and required for a checking account, line of credit etc. Go to www.irs.gov and click on “Apply for an EIN” under “Online Services”. It only takes a few minutes. Select the option for obtaining your letter online as a PDF. Bring this document and your LLC filing to your local bank and they’ll get you set up.
3) Keep it in the Bank: Once you have your bank account set up, it should be the destination for all revenue earned by your band. Although most small venues deal in cash, it’s wise to deposit everything in your business bank account before paying for expenses. Your manager and other business professionals will be paid on a percentage of your gross or net earnings, so a detailed record is key. Make a record of any expenses you make in the course of your business operations. For tax purposes, categorize your business expenses (i.e. travel, gear, promo, food, etc.), as this will make itemizing your deductions easier down the road.
How & When to Pay:
When and how much you pay people who work for your band will depend on many factors. While there are a variety of tradesmen, professionals, and artists that you will hire, they will generally fall into only a few categories:
Servicers: In most circumstances, this will include everyone from your lawyer to your manager to your accountant. These professionals should be paid out of your bank account like you pay any service provider in your personal life (guitar repair tech, plumber, mechanic). No special tax forms or employee arrangements will apply (but more on that later). Simply cut a check from your band’s checking account and keep track of the expense. Keep in mind that many of these individuals work off a percentage of your income (manager: 15%, agent: 10%, business manager: 5%). An important consideration is when the fee will be paid to these professionals: monthly, quarterly, semiannually, or “by-the-gig.” The more consistent your revenue, the more consistent your payment will be (i.e. if your group plays all year round, setting up a quarterly payment schedule should be easy. However, if your gigs are sporadic, a more specialized payment structure should be arranged). No matter what your system, make sure your payment percentage and timeline are committed to in writing at the outset of your business relationship.
Employees/Independent Contractors: Throughout your career, there will be a multitude of individuals who you hire who will be classified in one of two camps: “employees” or “independent contractors.” The distinction is important because it determines how you pay the individual and includes a variety of tax consequences. There is a gray area between the two, but the IRS generally looks at three factors to distinguish: behavioral control, financial control and relationship. Employees are told when, where and how to work. Employees have set hours and are paid an hourly wage or salary. On the other hand, independent contractors work on a project-by-project basis, and can take as much time as they need to complete the project for a set fee. Employees will have vacation days, sick leave, and will likely use equipment or office space provided by your business. Why are these distinctions important to you? It’s dollars and cents. For each employee, your band will have to pay federal payroll taxes, unemployment taxes, deduct applicable state/federal income taxes, and provide tax forms to the federal government. For an independent contractor, you simply pay what amount is owed and, at year’s end, provide the individual with a tax form called a 1099. A great example is a photographer. Hire them for a tour, and they’re probably an independent contractor. Hire them for an indefinite amount of time, covering your day-to-day (recording, interviews, tours, promotion, leisure time) while providing them with equipment and space to edit, and they’re likely an employee.
Partners: Your “partners” are your bandmates and, for better or worse, you split what is left over after all the necessary expenses, servicers, and employees/independent contractors are paid. If done the right way, there should always be a good amount left (at least proportionally) once overhead is paid. You can pay the partners directly from your band bank account. The income will be taxed through your personal income at years end, with each band member filling out an IRS K-1 form. So who gets what? As part of your LLC – as discussed above – you’ll want to create an “Operating Agreement,” which is essentially a rule book for the partners to abide by. An operating agreement lays out an understanding of how money is raised, profits are split and partners bought-out. Specific to partner payments, make sure to include terms in percentages and timing. It’s also important to determine what money will be kept in your band’s account to front overhead expenses for the next pay period.
Adam Barnosky is a Boston-based attorney and writer. For music industry news, entertainment law updates, or to suggest an upcoming Legal Pad topic, find him on Twitter @adambarnosky.
Disclaimer: The information contained in this column is general legal information only. Consult your attorney for all specific considerations.