Personal Finance for Musicians

/

When I was young I was taught to save.  When I was in college I was excited to spend my savings - on a camera, a car, and a computer.  I spent all my savings.  

Now I look back at those lessons from my youth and realize that “savings” really means two things so I’m going to start my version of this lesson, to you, with an updated message.

In your “household” business, there are three buckets of money out of which you operate: checking for monthly needs, money market for annual needs or emergencies and investment accounts that you don’t touch until you can live off of the returns.  

  1. The first bucket is a checking account for your monthly “nut” to use a music biz term.   This your daily/monthly cash need.  This includes rent/mortgage, car payment, gas for the car, groceries, utilities, and the like.  You can count on these costs to be roughly the same throughout the year.  This money is kept and spent out of a checking account.

  2. The second bucket is a money market account or other high yield savings account that you use for either emergency or for annual or non-regular expenses.  Many personal finance experts recommend six months of living expenses for this account.  Personally, I transfer a set amount of money each paycheck into this account and then I use this account to pay for annual vacation, unexpected house repairs, sometimes tax bills, and of course it’s there as an emergency fund in case it’s ever needed otherwise.  Say your primary income derives from touring and you injure yourself and can’t tour or make money for a period of time, this fund could help you through that period.  I think that this bucket is what many people refer to as “savings” when they tell you to save.

  3. The third bucket of money is the general category of investments which you do not touch until such a point that you live off of them. This is the category that I think people fail to mention when they discuss savings.  You put money into this “bucket” and you don’t touch it under any circumstances until either you can live off of 4% of the total invested or you get to retirement age and you are forced to take money out (if it was invested in retirement accounts).

Financial Independence is having enough money in bucket 3 that you can live off the returns.

If you follow the theories of modern personal finance, then the main idea is to save enough money in the third bucket that you can live off of it.  That is what is called Financial Independence.  Most financial advisors say that if you figure out how much money you need to live each year, you can divide that number by .04 (or multiply by 25) to get the total amount of invested money you need to live on without any other income source.  The idea here being that this money is invested in the market (index funds, etc) that will yield on average more than 4% per year.  Say you need $30,000 per year to live; multiply that by 25 or divide by .04 and you get $750,000.  This amount of money invested will yield you at least 4% per year in returns and thus you will have your $30k per year income from your investments - no need to do other work.  Again, this is called Financial Independence.

You may be looking at the three buckets of money and saying to yourself, ‘this makes sense to me but i’ve never been able to move beyond the first bucket.’  You may live day-to-day with your income and expenses.

Framework for Steps toward Financial Independence

Let’s get some framework for how you move from bucket 1 onward.  Joshua Sheets of Radical Personal Finance has discussed what he considers the Seven Stages of Financial Independence.  

Stage 0 – Total Financial Dependence. Everyone starts here. When you’re a child, for example, you’re dependent on grown-ups.

Stage 1 – Financial Solvency. You can support yourself, without help or handouts from others, and you’re current on your bills.

Stage 2 – Financial Stability. You can support yourself, your bills are current, and you hold some savings.

Stage 3 – Debt Freedom. You’re debt-free, in addition to the points above. It’s your choice whether or not you want to include your mortgage within this definition. (Joshua elaborates on debt paydown during Episode 32 of his show.)

**My notes here: There can be a lot of time between stage 3 and 4 and likely many musicians will be beyond Stage three but not yet at stage 4

Stage 4 – Financial Security. You have enough investment income to cover basic, bare-bones living costs.

Stage 5 – Financial Independence. You have enough investment income to cover your current lifestyle.

Stage 6 – Financial Freedom. – You have enough investment income to cover BIG dreams and upgrade your lifestyle.

Stage 7 – Financial Abundance. – You have enough investment income that you cannot possibly spend this money. Vast amounts of your money will outlive you, and your focus is wise stewardship of this wealth so that you can leave a beautiful legacy.

Moving toward financial independence is more about your spending and psychology than it is about how much you earn.

With this context in place, a natural question may be, ‘how do I move forward from Financial Stability or Debt Freedom?’  Make more money is certainly part of this equation but there are many excellent writers and thinkers who challenge the assumption that making more money is the answer.  As can happen with humans, the more we make the more ways we find to spend it.  There is a lot of psychology involved with having enough, knowing what that level is and just stabilizing there.  If you can do that, then when more  money comes into your accounts you can funnel it to your bucket 3 or bucket 2.  It would be impossible to list all of the ways you can focus on cutting costs and saving money so I’ll list some of my favorite writers who tackle these topics here:

  • Mr Money Mustache: His primary focus is on financial independence through frugality and smart living.  Humorous yet serious writer.

  • Early Retirement Extreme: This man learned to live below the poverty line and invested the rest.  The book is an interesting one, worth the ready

  • Your Money or your Life: this one is considered to be the first Personal Finance book written in the FIRE (Financial Independence Retire Early) community.

How to reduce one of your biggest expenses - Taxes!  

Part 1 - Claim all possible Business related Expenses

This post is dedicated to Personal Finance.  By definition this is the money that flows into your personal accounts or what I call the “household business” - it’s the profit from your music business endeavors.  But for a quick moment I want to touch on your music business endeavors.  On the business side of your affairs, before the profits flow to your “household business” you have the opportunity to claim many business related expenses. Please be smart about this process and claim all of those expenses.  I won’t go into it all here but the list can and should include:

  • Mobile phone bill

  • Home office deduction

  • Instrument repair and maintenance

  • Computers and software and subscriptions for services

  • Education and reference (lessons, etc)

  • All business meals

  • Travel meals - be sure to ask your accountant or business manager about claiming gov’t per diem rates for every city you travel to.  If you generally spend less than $50 per day in meals you could claim the gov’t rate under an accountable plan and save lots of tax dollars.  

Part 2 - Retirement Accounts

The greatest way to reduce your income tax bill *and* move yourself forward on the path to Financial Independence is tax advantaged retirement accounts.  For every dollar that you put into tax advantaged retirement accounts through the year you will save roughly $.20 (20%) in taxes not paid.  So if you save $1000 into retirement accounts this year you would save roughly $200 in your tax bill.  Ask your accountant for specific figures when the time comes.  

Since everyone’s personal situation will be different, I won’t go into the specifics, but will instead lay out the general structure of retirement accounts here.

You have access to two main classifications of retirement accounts:

  • Business side accounts

  • Personal side accounts.

Business Side (Workplace) Retirement Accounts

On the business side if you own your own business you can set up a SEP IRA or a i401k also called a solo401k.  Initially for my wife who is a photographer we had a SEP IRA set up and then after reading further about the solo or i401k I found that you could actually contribute more money to it annually so we switched.  You can ask your accountant for specifics but the i401k seems like the best bet to me.

On any given business retirement account there is the Employer Contribution and the Employee Contribution.  This pertains to a business that sets of a formal 401k or for a single member LLC that does an i401k.  

The Employer Contribution (of the business side retirement account) is going to be dependent on either the profits of the business or the salary of the employee.  

  • If you are an owner/employee of an S Corp then this amount will be dictated by your salary and the rules of your 401k.  Many of the businesses I work with use Guideline 401k and Gusto payroll.  We have the Guideline 401k set to a maximum employer contribution of 6% of the employee’s salary.

  • If you a single member LLC then the max you can contribute is 20% of the net income (subject to limit of $61k total)

The Employee Contribution is up to the individual - either the employee or the solo member of the LLC.  On this side you can contribute a maximum of $20,500 for 2022!!  At a 20% tax savings (estimated) that would be $4100 in tax savings!  If you have the means, max this one out.

In total, on the Business side of retirement accounts you can invest $20,500 (employee) plus whatever the employer side can contribute - ask your accountant at tax time.

Personal Side Retirement Accounts

On the personal side, regardless of your business retirement accounts you can have an IRA. There are two types of IRA - one is a Roth IRA and the other is the Traditional IRA.  

The Traditional IRA reduces your tax bill now - so the money goes in pre-tax, but then it is taxed when you take it out.  Personally I prefer this since I expect to have a lower tax bracket in the future than I do now.  I’d rather have the tax benefit now.  

The Roth IRA money goes in post-tax so it doesn’t reduce your tax bill now, but when you take it out the money is tax free.  In both cases the investments grow tax free.

I think the MadFientist is the best writer on these topics so I’ll link to his post on this matter.  And another: https://www.madfientist.com/stack-tax-benefits/

The max you can contribute for 2022 is $6000 per person into one of these accounts.  These are also subject to overall income limits if you are also contributing to a business side retirement plan.

Health Savings Account (HSA) as Retirement Account

Last but not least, you can also reduce your taxable income by making contributions to an HSA.  If you have a high deductible health insurance plan with an HSA attached, like I do, then you can contribute $3650 (or $7300 per family) to an HSA account in 2022 and invest that money like it’s a retirement account.  If you don’t yet have this type of insurance coverage check with your insurance broker to see if this type of policy might make sense for you.  The intention is to have that money put aside to cover medical expenses tax free and my understanding is that you don’t need to draw that money in the year that the expense occurred.  You can hang onto the receipts and reimburse yourself at some point in the future while letting your money grow in the meantime.  As always, discuss with your Accountant.  

Here is a read from the MadFientist where he explains this strategy in detail. 

Combining the 401k, the IRA, and the HSA you could be contributing tens of thousands of dollars each year to retirement accounts - the max would be somewhere around $60-70k per year per person.  Once these are maxed out annually you can look into traditional investment.

With all of the above said, you should have the framework and deep dive reading links to get you moving on the path from Financial Dependence to Financial Abundance.  

A couple of books that I highly recommend that didn’t make the links above:

Quit Like a Millionaire This is my favorite personal finance book right now.  I’ve read parts of it twice.  Written by a thirty some year old who grew up financially poor in China, she and her partner lived frugally and invested and retired early, living on $40k per year.  It’s an excellent read that flows well but contains lots of good technical information as well.\

The Simple Path to Wealth Written by JL Collins, who is a well respected writer in the FIRE (financial independence retire early) community.  JL was not interested in retiring early, but he was interested in smart investing and living.  What made him famous in the community was a series of posts on stock investing or index investing which was turned into this book.  I will often say that getting your money into a retirement account is like getting it into a Garage, but then you need to pick what kind of car in the garage you are going to put that money into - a station wagon (think government bonds) or a McLaren (think an individual stock that might be sexy and fast but hard to predict) or a Volvo (index fund - safe and good performance).  JL talks a lot about what kind of car you want in the garage.

A final note about the above systems: Everything is temporary and We are a Product of our Environment

A note here to put all of this in context: What is laid out here is a summary of the research and personal trial and error that I have implemented.  This speaks only to the modern personal finance theory and doesn’t really reflect whether this whole system is good or the best use of human brain power.  :)  As with all things this theory is temporary and doesn’t address humanity’s long term challenges.  

I say modern because the 401k was only invested in 1978 and the IRA invented in 1974.  The very idea of retirement was only invented in the late 1800s.  And the idea of index funds only started in 1960.  This is modern and we do not know how long this model will last but it is the predominant model now.  It will almost certainly continue to exist in our lifetime but beyond that I can not say. 

I say temporary because this model is based on endless growth (more humans consuming more things)  What happens to the stock markets and our whole financial system as the world population decreases in the coming decades.  With less people to consume products and services, I assume economies contract and maybe then a More Beautiful World will be built.

I also want to mention that I have ready many books on our current financial system and all of its flaws.  In this category I highly recommend Sacred Economics by Charles Eisenstein and for a bit more technical insight (the first book I read on money system design)  The Future of Money by Bernard Leitar.  There are many people who I admire, including Charles Eisenstein, who believe that the only real security you get is through your deep social connections and in some cases don’t even attempt to save but rather make it a point to distribute all of their money to other people at all times.  It’s amazing, and to me very brave… mostly because I’m stuck in the tyranny of the modern system.  In times when you need them, would you rather have a deep network of friends and family or a fat bank account?

What’s so great about the S-Corp anyway?

/

Hey Ben,

I’m curious to get your thoughts on whether we should be an LLC taxed as partnership or elect to be taxed as an S Corp?

Sincerely,

Mo Money Less Taxes

**

Dear Mo Money Less Taxes,

As always, keep in mind I am not a CPA and you should use this info to get informed and then ask your CPA or advisor what is best for you and how this all relates to your personal tax situation.

An S Corp is set up in recognition of the idea that there are both owners/investors into a company and employees who work for that company. In our example here of a music business, a band business specifically, let’s go full blown caricature. The business owner is the a Captain of Industry with his rotund belly, monocle, three piece suit, and cigar. Then there is the employee, the minion on the the factory floor toiling away for the dollar.

When you choose to take your small business, band business, and have it taxed as an S Corp you are saying to the government that you intend to have both minions and Captains of Industry involved in your business. And in the case of this kind of business, you hold both roles - you are both a Minion toiling away, and a Captain of Industry glaring down at your Minions on the factory floor.

As a Minion you are paid a wage. You are an employee and you receive a W-2.

As a Captain of Industry, you are paid through the profits. You keep expenses and wages down, you increase earnings, and you squeeze more profit out of your business. In this case, as a shareholder you receive a K-1 for your share of the profits. 

As an employee your wages have Social Security and Medicare withheld. A total of 7.65% of every pay check up to $128,400 for 2018, after which SS tax drops off, which is 6.2% of that total, and then it’s just Medicare at 1.45%. The company pays the same percentage but as a company expense. That’s a total of 15.3% "payroll tax.” Then there is also income tax on these wages.

As a Captain of Industry, your profits are taxed only through Income tax. There is no payroll tax on this money since it wasn’t “earned income.” It came about instead, through your gutsy, bold, and cunning business acumen. The minions work for you, you reap the profits! No payroll tax for you then. Right there alone you have 15.3% total savings on these earnings up to $128.400.

Lastly, through the year 2025 there is also a deduction called the Qualified Business Income deduction. New tax law has 20% reduction of income tax on Profits (payment to Captain of Industry).  Your W-2 earnings (Minion pay) will be subject to the full income tax rate.

These are the reasons why people might choose to elect S Corp status. However, there are some other considerations to keep in mind:

You need to be paid a reasonable salary and that amount isn’t black and whie. Most CPAs I’ve talked to suggest at least 50% of your profit be paid as salary (minion pay), leaving 50% as profit distribution (Captain of Industry pay)

Because Social Security tax, which is the majority of the payroll tax, isn’t applied to Wages over $137,700 this S Corp election wouldn’t be helpful if you make approximately $280,000 per year or more since your 50/50 split would have your wage portion already exceeding the maximum Social Security tax.

Also with S Corporations, Unreimbursed Employee Expenses are no longer allowed on your personal tax return. As musicians in a group, if you personally have an instrument buying habit or gear habit that is related to your work as a musician but the S Corp isn’t reimbursing you, then you could lose the deduction of the expense on your tax return. In the case of a LLC partnership, the Unreimbursed Partner Expenses are still active as an option so you wouldn’t have this problem in an LLC.

You can read more on LLCs taxed as S Corps in this excellent essay.

https://www.llcuniversity.com/irs/llc-taxed-as-s-corp-form-2553/

CARES Act - Action Items for Musicians

/

As you know by now with the CARES act there are 4 primary parts that could affect you as a musician:

  1.  $1200 checks being mailed to all individuals who make under $75k and if you make between that and $99k then you will get a portion of it.  Also $500 per child dependent under 17.

  2. Unemployment benefits are being extended to include self employed individuals. 

    • If you are paid as an employee (through Gusto) then you can already apply as the system is designed for your situation. 

    • If you are owner of LLC or sole proprietor, then you fall in the self-employed category and you’d be eligible for this new type of unemployment.

      • As of writing this (Sunday April 5, 2020) I am not aware of a single state that has integrated this new law into their Unemployment system though. This means that if you go to apply you’ll find a note asking you to wait, or something similar. You’ll need to keep checking in with your state to see when it’s ready.

      • Also note that you can not be on Unemployment AND be recipient and user of Payroll Protection Program (mentioned below) simultaneously. So if you go on unemployment and then you get PPP you’ll need to put unemployment on hold.

  3. Economic Injury Disaster Loan:

    • How much can I borrow and what are the terms?

    • What to use it for?  

    • Who is Eligible?  

      • Businesses with fewer than 500 employees 

      • Cooperatives

      • ESOPs, and tribal small businesses with fewer than 500 employees

      • Sole proprietors 

      • Independent contractors 

      • Most private nonprofits

    • What about this EIDL Advance of $10,000 that I keep hearing about?

      • From what I have read the language is that there can be an advance “up to” $10,000.  Though I can’t find any evidence online of anyone receiving this grant yet.

      • I have read conflicting reports on whether this advance needs to be repaid or not.  Some sites state that it does not need to be repaid under any circumstances. Others state that it might need to be repaid unless used on specific expenses like payroll.

    • In summary, given the lack of details about the advance and the promise of the advance potentially being forgiven, I think it makes sense to apply for this loan through your business entity. If the loan and advance come through and the PPP (below) comes through then we can discuss the best course of action. In other words, we’ll get more details on these things the more that times goes by. Once we starting getting responses on both loans we can determine which one to accept or possibly take both if possible and it makes sense.

  4. Payroll Protection Program (PPP) - 

    • How much can I borrow and what are the terms?

      • You can borrow up to 2.5 months worth of payroll.  This loan is a 1% loan that needs to be paid back in 2 years if any portion of it is not forgiven.  

    • What can I use the money for?

      • Payroll costs, including benefits (up to $100k per person per year);  

      • Interest on mortgage obligations, incurred before February 15, 2020;  

      • Rent, under lease agreements in force before February 15, 2020; 

      • and  Utilities, for which service began before February 15, 2020.

      • The loan will be forgiven if it is used primarily on payroll.  I understand that at least 75% of the money needs to be used on payroll.  

    • Who is Eligible?

      • All businesses – including nonprofits, veterans organizations, Tribal business concerns, sole proprietorships, self-employed individuals, and independent contractors – with 500 or fewer employees can apply

      • It is my understanding that businesses that have actual payroll will be able to apply first and then on April 10, independent contractors and self-employed with no employees will be able to apply.  There has not yet been clarity on how partnerships apply for this loan if they don’t have payroll. Still waiting to get clarity on that.

    • And what is included in payroll?  

      • If you run actual payroll through Gusto then these amounts are included in payroll.

      • If you are single member LLC or sole proprietor, then as I understand it you would take your profit from 2019 and divide by 12 to get your average monthly profit and this is what you would claim as your monthly payroll.

      • If you are a partnership and pay yourselves with Guaranteed Payments then, unfortunately this isn’t clear yet how they want to deal with this.  It’s either going to be that you file as partnership and claim guaranteed payments as “payroll” or each partner will file individually. I am hoping for more clarity on this in the coming days early this week.

      • One thing is clear, In the Interim Final Rules document from the SBA they stated clearly in Section 2H that independent contractors do not count as payroll costs. So when you pay musicians or crew on the road who are not owners, this is not considered payroll 

        • Do independent contractors count as employees for purposes of PPP loan calculations? No, independent contractors have the ability to apply for a PPP loan on their own so they do not count for purposes of a borrower’s PPP loan calculation.

    • In summary, Artistzen likes this PPP option for every client we work with.  Though we are still trying to figure out how the Partnerships will take advantage of this, we expect it to be cleared up soon.  We are here to help you through this application by helping figure out your annual and average monthly payroll or anything else you need for the application.

      Ideally, these applications get filed and processed quickly and this money comes in to pay team members or yourselves for April, May.  Then if the EIDL comes in and some of that money will be forgiven (the advance) for payroll, etc then that cash can be used for the next month of June.  If money still needed then unemployment would be a good option.

Covid-19 Coronavirus - Resources for Musicians

/

We will continue to update this resource list as more information becomes available.

RESOURCES

Musicares has a relief fund offering a maximum of $1000 “grants” for musicians affected by Coronavirus related show cancellations. More information available here.

The Small Business Administration (SBA) is offering loans for economic disaster relief related to Coronavirus. These are only being offered to certain states right now but just in the past day I have seen the list of affected areas grow. Visit their website here to see if your area is on the list. You will also find the “apply online” link on the same page.

IRS Tax Payments due around July 15 ( 90 days after April 15). Consult with your personal tax preparer. At this point we suggest still trying to file on time - April 15 for personal taxes, but keep in mind that no payment will be due at that moment. Take advantage of this as you will need every spare dollar to get through this time without shows. Read more here. Updated state tax information here.

State disaster relief funds. We don’t know all of the states offering these funds but here is an example for the state of Florida.

Unemployment Insurance - If you are an employee of a company (you get a paycheck and W-2 at year end, not a 1099), then you can likely apply for Unemployment. Check with your state but several have opened up unemployment to workers temporarily out of work due to Coronavirus.

Sweet Relief Musician Fund here.

Ways to Make Money

Below are some income-generating ideas that have worked well. We will continue to update as more ideas rise to the surface:

How to maximize business income, minimize taxes, and saving/invest for retirement - in priority order

/

This is a brief summary of the levels of how I would approach maximizing income, minimizing taxes, and investing/saving in order of priority:

1. On the business side, be sure to collect all money possible (soundexchange, youtube, streaming mechanicals, etc) and be sure you have a system in place to be sure no checks go missing (on a busy tour, they do often, I assure you).

2. Minimize your business profit with deductions. Be sure you claim gov't per diems for every night you are away from home for work, keep track of all mileage, deduct home studio space, all travel related to work, cell phone, spotify subscription, computers, software, etc. All of it that is related to work.

3. Next, I would look at health insurance and also retirement savings. Both of these could be on the personal side (not business) but they can also be on the business side. Depending on how your business(es) are structured you could do a SEP IRA or you could do a 401k. You can stash a lot of pre-tax money into these accounts for later down the road and invest them in index funds for low fees. Then you can also do personal IRA (like a Roth IRA which isn't tax advantaged).

On the health insurance tip you can set up an HSA and stash money there and invest it also and treat it like a 401k. You can also make health insurance a business expense so it's pre-tax. Some of this depends on your business structure (LLC taxed as S Corp, sole proprietorship, etc)

4. Lastly, after all of these things if there is still money to invest, then I'd look at Real Estate, regular investing, crowdfunding investing, etc. There are some new low risk ways to invest in real estate now with companies like Fundrise. Notes on this mentioned in another blog post.


How do I invest my money in small businesses for social impact?

/

Let’s say you’ve made it to the point where you have more cash than you need for monthly living. As an artist you are sensitive to investing money in a socially responsible manner. You don’t want to just stick your money into an index fund which will then invest in corporate banking, oil, tobacco, and fast food. What are you options?

One of the ways you can invest is through crowdfunding which you will be familiar with due to sites like Indiegogo or Kickstarter. This is similar but a bit different because with crowdfunding investing you are actually purchasing a piece of the company. This might sound unusual because it is fairly new. This has only been possible since 2016.

The JOBS Act (Jumpstart Our Business Startups Act) passed in 2012, but the new law had to get worked through the SEC rule book first and it finally went into effect in 2016. What does it do?

Prior to the JOBS Act if you wanted to invest in private companies through a public solicitation you would need to be an Accredited Investor meaning you make $200k+ per year for at least two years or have over $1M in assets.

With the JOBS Act, Title III, Non-Accredited Investors (people under the limits mentioned above - which is more than 90% of the US population) can now invest in securities within certain rules. One of the rules is about income levels which limit how much you can invest. The other rule is that these securities can only be transacted through an SEC registered portal.

For More Reading:

Now, the question is, are there any portal companies out there with SEC registration that are focused on Socially Responsible Investing? Possibly! There are so many and I haven’t gotten to read through them all yet. Here is the list of all regulated portal sites and I assume there is at least one in here with social impact at its core: https://www.finra.org/about/funding-portals-we-regulate

Even if one doesn’t exist yet in this list, there will surely be one soon so keep looking and I will continue to post extensions on this blog as I learn more.

On a related note, crowdfunding real estate is another option. Though it may not be as impactful as a company with a social mission, it is still a way to invest in small business. Read here for more info on some of the Real Estate crowdfunding sites:

https://millennialmoney.com/real-estate-crowdfunding/

How do you determine financial success in your music business?

/

Two close boyhood friends grow up and go their separate ways. One becomes a humble monk, the other a rich and powerful minister to the king. Years later they meet. As they catch up, the minister (in his fine robes) takes pity on the thin, shabby monk. Seeking to help, he says:

“You know, if you could learn to cater to the king you wouldn’t have to live on rice and beans.”

To which the monk replies:

“If you could learn to live on rice and beans you wouldn’t have to cater to the king.”

- Parable borrowed from jlcollinsnh.com (an excellent personal finance blog)

There are myriad ways to judge financial success of your business, especially because your business is really 4 businesses (recordings, songs/publishing, performances, and merchandise). Below we’re going to look at a few of the basic ways to judge success.

One way is to look at the top line. This is your gross revenue. The more you make from licensing, the larger your crowds at concerts, the greater your gross revenue. Say your licensing and concerts yield you $100,000 in a year - that’s your top line.

Another way to look at financial success is to measure the bottom line in relation to the top line - this is called your profit margin. Using the $100k example above, after all expenses to crew and management and travel you end up with a net of $30,000. That’s your bottom line. Your profit margin here is 30% ($30k/$100k). In the live touring business with management, biz mgmt, lawyer and all the standard expenses of touring you can expect a profit margin of 30-35% on average.

Another metric is to look at profit per member. Using the above example, imagine the business was owned by one person so profit margin of 30% and $30,000 for one person is $30,000 take home pay for that person. Imagine that business with 4 members and you’ll see that the take home pay per member is $7500.

Using these three options above, how would you be inclined to judge success? I think most of us would judge success by the first option - top line. Visually we can estimate this level of success very easily. How many people could they get into an show? How many plays on Spotify? Those are the sexy numbers.

I would make the case that metric #1 above is also the worst way to judge success for yourself even though it’s the sexiest. I find that when you look at the big picture and simply state, I want to get there, you end up spinning on that image and getting depressed that you’re not there instead of focusing what’s in front of you right now. What’s in front of you right now is that you have a band and you can play some shows and record and distribute a record, all for very little money. So…

What you really want to focus on is the most unsexy - reducing expenses right now and driving up Metric #2 - your bottom line. You want to shoot for the moon, and you should. If you want to be an arena act, that’s great. Just know that there is one skill that you can learn now that will travel with you all the way to the big leagues - and that’s the skill of keeping expenses trim. Of running a lean business. Learning how to judge what expenses or investments are important for what stage of growth and when to invest to get a certain return. It’s a thoughtful process and skill and I often turn to Mr. Money Mustache when I need a pep talk or some inspiration… and you should too. Learn how to run a tight ship now and then when the money does come pouring in, you don’t squander it because you’re a seasoned money manager.

Metric #3 above, the profit margin per member is my next favorite. Pull back the covers and you’ll realize that sometimes a band making twice as much money as another may actually take home less money per individual. One band makes $900k and has 5 members and a 22% profit margin - each member takes home $40k. Another band makes $450k and has 4 members with a 50% profit margin and each member walks home with $56,250. (These are based on a true story :).

There is no right way to get the profit per member to the sweet spot. It’s a dance of lifestyle choices, artistic vision, and judging what’s important for the critical path. What is clear is that the skills you develop in thinking about each investment/expense along the way and purposefully pushing yourself to maximize each stage of development with the resources at hand will go with you throughout life.

The ultimate goal is to live comfortably on your art and be able to save and invest for your future self. The best way to do that is to increase your profit margin.

You are an artist and a business owner

/

In the modern era, there is no such thing as just being an artist. Perhaps it’s always been that way for the most successful artists - that they were also keenly aware that they were also business owners. I read that Mick Jagger attended London School of Economics and was always on top of the Rolling Stones’ business affairs. Certainly now though, you can’t escape the fact that you need to think and act like a business owner. The joy of having a fractured marketplace where thousands of bands can have thousands of fans is that you can make a living on your art. You may not get Taylor Swift famous or Jimmy Buffet rich but you will be able to support yourself and even get to the point where you can make enough money to save and invest for the future “rainy days'“ and retirement. In order to do this though you need to watch your expenses and deeply consider what’s important to your critical path of success, and be sure you capture all of the money in and notice when it’s not there. In other words, you need to be a Business Owner, not just an artist.

You hold the strings. You hire a manager to help you grow your business… but you hire the manager and you determine how they are doing. It might seem like they have the leverage and that’s how most artists treat it, but who owns this business at the end of the day or the term? You do. Think of another business that’s just starting out and the time comes for them to hire an executive to help them grow the business? Do they just close their eyes and hope for the best? Nope. They hire, engage, and help drive the ship and set that executive up for success and they also have the difficult conversations about what’s expected in terms of results. You hire a business manager and you expect the same. Outline what you want and expect in terms of information and transparency and know that ultimately this is your business.

Will you still have time to be an artist? From what I have seen of our clients, yes, you will still have time to be an artist. You will have your daily routines to keep you grounded and you will take extended periods for reflection and writing. And on the days when the business hat is on you will check in on your team. You have no choice. You are a business owner and an artist.

How do I earn money from songwriting?

/

I understand there is some question about how publishing money is earned and split along the way.  I'll do my best to explain below.

At the foundation, as you know every song has 2 rights associated with it - a right for composition (those who wrote the song and/or the publisher) and a right for the master/recording of the song.

To determine how a song earns money you need to first consider how the song is used.  Depending on how it's used there will be different entities collecting money and the amount paid for type of use varies as well.  

The most common uses are listed below:

Public Performance of the song - When played on the radio, when streamed on Digital Service Providers (DSPs), when performed by a band live.  

Collected by: PROs like ASCAP, BMI, or SESAC.  The radio station, the DSP, the venues/festivals all pay an annual license fee to the PROs to be able to have music playing publicly.  

How payments are determined and made: This is a black box calculation.  It depends on the entity paying the PROs but they usually make a payment based on revenue.  Then the PROs do some kind of auditing throughout the year to determine how often songs are played and then based on that they make payments to the writers/publishers.  


Sale of a song or pressing an album - When an album is pressed or a track is sold digitally, a mechanical royalty is due on that track.  

Collected by: In the case of a song release on a major label, the label would typically pay the writers directly.  In the case of a self-release mechanicals may not get paid at all internally.  In the case of a song covered by someone else, the payments may get made to Harry Fox and then your publisher would collect them from Harry Fox.

How Payments are determined and made: Mechanical payments are $0.91/song and this can be negotiated a bit with a label but this is the gov't set statutory rate.  

Interactive Streaming on DSP - When a track is played on a DSP like spotify, two composition payments are made.  One for public performance and one for a small mechanical.

Collected by: the public performance payment is collected by the PROs.  The mechanical payment is made directly by the DSP and collected by your publishing admin or Harry Fox (which then is passed on to the publishing admin)

How Payments are determined and made: In the case of the public performance royalty, it's the black box calculation again as it goes to the PROs.  In the case of the mechanical paid, my understanding is that it's around $0.0008 per song.

Sync licenses - Half of every sync license is for the composition side.

Collected by - Usually these are paid directly to the artist or to the sync agent

How payments are made and determined - Once the money comes in, the payments made follow the splits of the song as it's registered.

**

What kinds of insurance should I carry for my touring band?

/

Only you can ultimately answer this question as the business owner but I’ll outline the primary types of insurance that bands carry, explain the purpose of the insurance, and give you a general idea of cost. With this information, hopefully you’ll be better able to make the decision of what insurance to carry.

General Liability Insurance

Purpose: This insurance covers you for property or bodily damage caused by your business up to a limit, usually $1M or $2M per incident. It is not uncommon for festival and government promoters to require a Certificate of Insurance for this coverage.

Example: If you throw drum sticks from stage and injure someone, this type of insurance would cover you.

Annual cost: Between $1000-2500 is the approximate range with $500-1000 deductible. You can get one-off coverage sometimes by being added onto the promoters policy in the case of festivals, or you can apply through https://www.theeventhelper.com for a one day policy that will cost around $200.

Workers Compensation Insurance

Purpose: This insurance covers medical bills and a portion of lost wages for a person injured on the job. This insurance is issued in relation to the state of residence of the employee or contractor. You might think, well, I have health insurance for that, but if your health insurance discovers that the injury happened on the job they may (and likely won’t) cover the medical bills.

Example: Crew member is pushing a case up a ramp into the trailer and his knee gives out. Or band member is on stage rehearsing and slips off the edge and injures leg.

Annual cost: Approximately 1-4% of annual payroll, depending on the state and the job the employee does. If you have all Virginia employees doing clerical work the rate may be 1.1% and if you have a FOH sound person on the road based in California the rate may be 4.0% or more. There are also minimums per state so even if you have only $10k of payroll in Virginia, there may be a minimum of $35k; this depends on the state.

Automobile Insurance for Owned Vehicles

Purpose: This insurance can coverage liability and collision. Most of you will be familiar with this insurance from insuring your personal vehicle. It works a lot like that except that sometimes an insurance company will want this policy to be a commercial policy which can be a bit more expensive.

Example: You hit a deer on the highway or get into a fender bender. You call up your company - Geico, State Farm, Erie, etc and they help you through the process.

Annual cost: $750-2500. I’ve seen this upper end go up to $4000 for a 3-year leased Sprinter but that was an outlier.

Hired and Non-owned Automobile Insurance

Purpose: This insurance covers vehicles used on behalf of the business for business purpose. It often covers rented buses or rented vehicles (like vans from the airport) or crew member vehicles in use for work.

Example: A crew member driving their own vehicle, towing the band trailer to meet the tour bus and the vehicle is involved in a fender bender. This vehicle could be covered. Or a tour bus is being rented by a band and damage is caused to it, this insurance would cover that.

Annual cost: $750 and this is added onto a commercial auto policy. I’ve not seen one of these written as a stand alone policy. Deductible usually $500-1000.

Equipment Insurance / Inland Marine Insurance

Purpose: This insurance covers your equipment and gear up to a certain amount per policy period. It can be a policy with scheduled equipment meaning that you list out ever piece the policy covers or it can be unscheduled where the policy just covers equipment up to a certain amount but the equipment doesn’t need to listed out. This policy covers equipment both on the road and in your studio (though you may also have renters insurance or home owners insurance for that gear). The basic idea of Inland Marine is that it covers equipment that moves around.

Example: Some jerk breaks into your trailer and steals your stuff. Happens all the time, right? Another example of this was a crew member using his personal truck to transport gear. His truck was broken into and the insurance reimbursed him for the lost equipment and his personal gear stolen since it was a business purpose and unscheduled equipment.

Annual cost: Approximately $500-1000.

***

All of these insurance policies make sense and are well worth the investment to keep you financially secure in case of an accident. I have seen every one of these policies used with either our band or festival clients. The expense seems like a burden annually until you actually need to use one of these policies and then it feels justified and like a good investment.

Is a single-member LLC more expensive than a Sole Proprietorship, especially in California?

/

Ben,

My Tennessee based client is currently using his SSN on W9s. i want to move to an LLC. 

My client’s accountant is advising them not to due to the fact that we would then have to file in CA and it would cost $700 more to do so. Is that true?

Signed,

No More Sole Prop

**

As always, remember I’m not a CPA, so you should consult with your CPA and lawyer on everything that you read here or anywhere. I often will read several sources on a subject and ask multiple CPAs. I’ve come to realize that tax related issues aren’t always black and white. That said, I’ll explain what I’ve learned…

1.  You don’t need an LLC to have a Tax ID. Even if he doesn't have an LLC he can still get a tax ID number for his sole proprietorship if you guys don't want his social security number out there.  https://www.irs.gov/businesses/small-businesses-self-employed/how-to-apply-for-an-ein

2.  Tax wise with Federal Gov't there isn't a difference between a sole proprietor and a single member LLC.  The single member LLC is a disregarded entity and ends up flowing onto a personal return just like the Sole Prop.

3.  That said often lawyers will recommend setting up an LLC and getting liability insurance to protect an individual's assets in case of a law suit; The corporate veil if you recall from Business Law 101.  As is stands right now with a sole prop, if in the case of a significant law suit involving the touring business, personal assets (homes, cars, etc) are all open game.  If you have LLC protection then those things can't get touched.  

4.  Regarding California or any state for that matter, my understanding is that if your business regardless of type (LLC, or Sole Prop) has nexus in the state then it needs to file a business tax return there.  Nexus means that the business operates there, earns money there, sells things there.... basically what happens every time a show happens in a state.  

That said, many bands making not much money play many states each year.  Technically even the smallest of bands, if they operate in multiple states, are supposed to file a tax return there.  But the administrative costs to do so would be too much for a small business.  So most businesses don't do it because such little money is made in each state.

California is a state like any other. Regardless of entity type (LLC, Sole Prop, etc) if your business has nexus there then it is required to file a tax return there. So just converting to LLC wouldn’t trigger the need for a return there. Having nexus is the trigger.

It is true that if you did file a corporate tax return in CA as an LLC there would be a $800 minimum tax which you wouldn't have as a sole Prop.  More info here. To the point in your email, a state having a fee is not unique to CA either. Most states, if you file there due to nexus, will have some kind of tax due.

5.  Other costs for the LLC might include: the tax return is probably a bit more expensive.  Most states have annual fees to keep the business active. Mass is $500/year for example. Obviously California is $800. Some states are minimal though. Virginia is $50 for example.

6.  Touring in Canada and AUS the limits would be the same as a single member LLC or as an individual.  You would tour in each place as an individual.  Both places have limits under which no withholding is required and likely no tax return required… but that’s another post for another day.

Ben