Turning your artist project into a legitimate business is the first step in achieving financial independence. Although many people find comfort in knowing that they’ll receive a regular paycheck from their day job, many of you reading this are probably sick of the day-to-day, soul-sucking experience that comes along with working for someone else. Additionally, when you run your own business, there’s no cap on the amount of money you can make.
Typically, taxes get taken off of your paycheck, but when you work for yourself, you don’t really get a paycheck. If you’re making a full-time income off of music and working for yourself, you still need to pay taxes. In 2018, if you were under 65, the IRS required you to file a tax return if you earned $12,000 or more.
Throughout the year, you need to keep good records of your business income and expenses. This will allow you to calculate your net profit for the year. You only pay taxes on your net income (income after deducting expenses), not your gross income (income before deducting expenses). Let’s say you made $50,000 this past year (gross income), but had $40,000 of business-related expenses that you had to pay for. You’ll only have to pay taxes on $10,000 (net income) since that’s how much money you’ll make after “writing off” all of your expenses.
The sooner you register your business, the easier it will be to separate your personal funds from your business funds, and the less of an accounting mess you’ll have to deal with down the road. Don’t wait until you’re making substantial music-related income to get your business registered and your finances in order; you’ll have years of bookkeeping cleanup to do by that point.
Getting the legal end of your business in order is actually much easier to do than you might think. There are many steps you’ll need to take along the way, but none of them are that difficult. The government wants people starting businesses, so they make the process simple enough that pretty much anyone can do it.
I’ll be providing you with a general overview of everything you need to get your artist business up and running. There are very in-depth resources available online that can assist you when starting a small business. Hiring a business lawyer to take care of this for you is ideal, but not required. If you live in the United States, you can find out more about starting a business here, and if you live in Canada, you can find out more about starting a business here.
1. Register Your Business Name
To begin, you’ll need to choose a business name. In some cases, you may use your own name as the business name, or you might register your artist alias as the business name. Black Ghost Audio is registered as “Black Ghost Audio” and my artist project, Virtus, is registered as “Virtus Entertainment.”
By registering your business name at both a state and federal level, you claim legal ownership of it. Registering an entity name can protect your business name at a state level, and trademarking your business name can protect it at a federal level. It’s also a good idea to secure a domain name, which protects your business website address. If you haven’t done so already, this is also a good time to claim all of your social media handles. You can use Namech_k to see if your desired handles are available.
2. Get a Tax ID Number
The next thing you need to do is get a federal tax ID number. If you live in the United States, you’ll need an Employer Identification Number (EIN), and if you live in Canada, you’ll need a Business Number (BN). These numbers will allow you to pay federal taxes, hire employees, open a bank account, and apply for business licenses and permits.
Once you’ve secured an EIN, you’ll need to check with your state to see if you’re required to obtain a state tax ID number. I know this sounds scary, but all you have to do is type “[Insert State] tax ID registration” into Google.
3. Set Up a Business Bank Account
Setting up a bank account strictly for business transactions is crucial. This allows you to separate your personal funds from your business funds. Once tax season rolls around, you’ll be happy you don’t have to waste an entire day sifting business transactions out of personal bank statements. I’ve been there, and it’s not a great experience.
4. Get a Business Credit Card
Do yourself a favor and get a credit card for your business immediately. There may be some requirements for you to obtain an actual business credit card. I know that some banks require you to have been in business for a minimum of two years before issuing a business credit card. If you can’t get your hands on a business credit card, don’t worry about it. Apply for a secondary personal credit card that you can dump all of your business expenses onto.
Most businesses take a loss the first couple years, and this is especially true if you have high start-up costs. I recommend you put all of your business expenses on your business credit card, to keep them separated from your personal funds, and then pay off the balance on your business credit card each month with your personal funds if necessary.
5. Set Up a PayPal Business Account
If most of your sales are in-person, you may not need a PayPal business account. Although, lots of music producers and musicians are capable of doing work online because of the advanced capabilities of home recording equipment. Using PayPal is one of the easiest ways to pay and get paid by people online.
6. Set Up a QuickBooks Account
At some point, you’re going to realize that you have money coming in from various different sources, and it’s getting harder to keep track of it all. You need central accounting software that you can use to keep track of your various incomes.
Cash payments, cheques, eTransfers, wire transfers, and PayPal are all common ways that people are going to want to pay you. At the end of the year, you need to be able to go to your accountant with an organized chart of accounts. This chart of accounts will allow your accountant to identify places in which they can save you money.
Quickbooks is the accounting software that I use, and I like it because it automatically syncs with my bank accounts, credit cards, PayPal, Stripe, and other payment platforms. You can save 50% on Quickbooks for the first 6 months if you use this referral link. If you’re making moderate income, the EasyStart plan should be enough to get you up and running. Once you want to get your accountant involved, you can upgrade to the Essentials plan.
7. Download a Receipt App on Your Phone
Most online transactions you make are tracked digitally, and a record of the items/services traded in exchange for money is kept on file somewhere. When you make a purchase using Amazon, you receive an invoice with a breakdown of the items you’ve purchased. If you get audited, a transaction like this is as clear as day, and there’s no question about whether or not the Moog Grandmother you bought was a music-related expense.
Online payments seem straightforward enough, but what about person-to-person transactions? If you go to Home Depot and spend $300 on your credit card, you’ll need to keep the receipt you receive at the cash register to prove that you bought lumber for a new studio desk, and not a flower pot for your garden. The $300 will show up on your credit card, but your credit card statement won’t contain the details of the transaction beyond the total amount you paid.
You’re meant to keep your receipts for six years from the day of purchase. I don’t know about you, but I don’t have a spare room in my house to keep all the receipts that pile up from buying guitar strings, and audio cables. I use an app called Expensify that allows me to store all of my receipts digitally.
Expensify has you take a picture of your receipts. It scans the information on the receipts, and then automatically matches them to items in QuickBooks. This is by far the easiest way to deal with receipts. Whether you’re keeping paper receipts, or uploading them to Expensify, you should make a habit of asking for receipts every time you make a purchase in-person.
8. Hire an Accountant
I don’t recommend trying to do your taxes yourself. A quality accountant is going to save you much more money than you’ll end up spending on them. There are loopholes, and things they know about that are going to optimize the amount of money you get back when you receive your tax return.
For example, did you know you can write off your home studio space as an expense? This works based on square footage. For instance, if you rent a 1,000 square foot apartment for $1,000/month, and you have a 250 square foot studio that you work out of, you can write off $250 of your rent as a business expense.
If you’re looking for a bookkeeper or accountant, I definitely recommend you check out PARO. It’s a website that matches you with the top 2% of financial experts who apply to work with them, so you end up getting connected with extremely qualified individuals. PARO provides you with a free consultation to determine what it is that you’re looking for, and a member of their team then works very closely with you to connect you with the right professionals.
Setting up the backend of a business isn’t that hard, and the government provides many online resources to streamline the process. Even if you’re not making very much money from music right now, it’s not too early to register your artist project as a business and separate your business funds from your personal funds.
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