Music Business Essentials for Artists

A music career is a business. It generates revenue, incurs expenses, involves contracts with other parties, and creates tax obligations. The artists and teams who treat it that way from the beginning avoid the financial and legal problems that derail careers later. The ones who avoid the business side because it feels uncreative end up learning it the hard way, usually when money is on the table and they are not set up to handle it.

This guide is not about revenue streams or royalty types. Those are covered in How Music Artists Actually Make Money and Music Royalties Explained. This guide covers the operational foundation: how to structure your career as a legal entity, manage money, handle taxes, evaluate contracts, and build the infrastructure that lets you focus on the work without the business side falling apart around you.

If you or your team have not done these things yet, start here.

Legal Structure: Why It Matters

When you earn money from music without a formal business entity, you are operating as a sole proprietor by default. That means you and the business are legally the same thing. Your personal assets (savings, car, anything you own) are exposed if someone sues the business or if the business takes on debt.

A formal business structure separates your personal life from your music business. It also makes you look professional to venues, labels, publishers, and anyone else who sends you money or a contract.

The Options

Sole Proprietorship. The default. No setup required. You report music income on your personal tax return (Schedule C in the US). No liability protection. Fine for artists earning small amounts who are just getting started. Not recommended once you are signing contracts, hiring collaborators, or earning enough that liability becomes a real concern.

LLC (Limited Liability Company). The most common structure for artists and small teams. Creates a legal separation between you and your music business. Your personal assets are protected if the business is sued or takes on debt. You can be taxed as a sole proprietor, partnership, or S-corp depending on what makes sense. Setup cost varies by state ($50-$500), and most states have a small annual fee.

S-Corporation. An LLC that elects S-corp tax treatment. Relevant once your music income is high enough (generally $50,000+/year in profit) that the tax savings from paying yourself a "reasonable salary" and taking the rest as distributions (which avoid self-employment tax) outweigh the added complexity. Talk to an accountant before making this election.

Corporation (C-Corp or S-Corp). Rarely necessary for individual artists. More relevant if you are starting a label or music company with outside investors. More complex, more expensive to maintain, different tax implications.

The Practical Recommendation

If you are earning any meaningful income from music (more than a few thousand dollars per year), form an LLC. It costs $50-$500 depending on your state, takes an afternoon to set up, and provides liability protection that a sole proprietorship does not. You can do it yourself through your state's Secretary of State website, or use a formation service (which adds $100-$200 to the cost but handles the paperwork).

Name the LLC something that works for your career. Many artists use their artist name or a variation: "[Artist Name] Music LLC" or a separate entity name. If you work with a manager, the manager may have guidance on this based on how contracts and payments are typically structured.

Separate Your Money

This is the single most common financial mistake artists make: mixing personal and business money in the same account.

Open a business bank account. All music income goes into this account. All music expenses come out of it. Your personal spending comes from your personal account. This separation is not optional if you have an LLC (commingling funds can void your liability protection). Even without an LLC, it makes tax time dramatically simpler and gives you a clear picture of whether your music career is profitable.

What to look for in a business bank account: No monthly fees (many banks offer free business checking for low-balance accounts), online access, and the ability to connect to accounting software. Local credit unions and online banks like Mercury or Relay are popular with small businesses.

A business credit card is useful for music expenses (studio time, gear, distribution fees, travel, marketing). It creates a clean paper trail for tax deductions and builds business credit history. Pay it off monthly.

Accounting and Bookkeeping

You need to track every dollar in and every dollar out. Not because accounting is exciting, but because artists who do not track their finances consistently underpay their taxes, miss deductions, and cannot answer basic questions like "am I making money from music?"

The System

At minimum: A spreadsheet that logs every income payment (who paid you, how much, what for, date) and every business expense (what you bought, how much, what it was for, date). Update it monthly.

Better: Accounting software that connects to your business bank account and categorizes transactions. Wave is free. QuickBooks is the standard for small businesses ($15-$30/month). Both generate the reports you need for tax filing.

Best: A bookkeeper or accountant who handles this for you. Costs $100-$300/month for a basic bookkeeping service. Worth it once your income is complex enough that doing it yourself takes significant time or creates risk of errors.

What to Track

Income sources. Distributor payments (streaming royalties), PRO payments (performance royalties), MLC payments (mechanical royalties), SoundExchange payments (neighboring rights), sync fees, live show guarantees, merch sales, direct-to-fan sales, brand deals, teaching income.

Expense categories. Studio time, production costs, mixing and mastering, distribution fees, marketing and advertising, gear and equipment, travel (gas, flights, hotels for shows and sessions), merch production, graphic design, music videos, legal fees, accounting fees, software subscriptions, website hosting.

Every legitimate business expense reduces your taxable income. An artist who earns $40,000 and has $15,000 in documented business expenses pays taxes on $25,000. An artist who earns $40,000 and does not track expenses pays taxes on $40,000. The difference is real money.

Taxes

Music income is taxable. If you are earning more than $400/year from music in the US (not a typo, four hundred dollars), you are required to file.

What You Owe

Income tax. Federal and state income tax on your net music income (revenue minus expenses). The rate depends on your total income and tax bracket.

Self-employment tax. If you are not on a W-2 payroll (which most artists are not), you owe self-employment tax of 15.3% on net income. This covers Social Security and Medicare, which an employer would normally pay half of. This is often the surprise that hits hardest. You owe this on top of income tax.

Quarterly estimated payments. If you expect to owe more than $1,000 in taxes for the year, the IRS expects you to pay quarterly estimated taxes (due in April, June, September, January). If you do not pay quarterly and owe a large amount at filing time, you may face penalties.

Deductions That Matter

Every legitimate business expense is deductible. Common deductions for artists include:

• Studio time and production costs

• Gear and equipment (instruments, microphones, audio interfaces, computers used for music)

• Distribution and streaming service fees

• Marketing and advertising costs

• Travel for shows, sessions, and industry events (mileage, flights, hotels, meals)

• Merch production costs

• Music video production

• Legal and accounting fees

• Home studio deduction (percentage of rent/mortgage for the space dedicated to music work)

• Software subscriptions (DAWs, design tools, project management tools)

• Education (courses, workshops, masterclasses related to your music career)

Keep receipts for everything. Digital is fine. A photo of a receipt saved to a dedicated folder works. The IRS can audit up to 3 years back (6 years in some cases). If you claim a deduction and cannot prove it, you lose it and may owe penalties.

When to Hire an Accountant

If your music income exceeds $20,000/year, or if you have complex income (multiple revenue sources, sync placements, international royalties, band splits), hire a tax professional. A CPA or enrolled agent who understands entertainment income will save you more in deductions than they cost in fees. Many offer flat-rate pricing for annual tax prep ($300-$800 for a straightforward return).

Contracts: What to Look For

Every professional relationship in music involves a contract, whether written or implied. The written ones are better, because you can read them before you agree.

Contracts You Will Encounter

Distribution agreement. Terms of service with your distributor. Key questions: Do you keep 100% of royalties? What happens to your catalog if you leave? Are there exclusivity clauses?

Producer agreement. Terms for a specific recording. Key questions: Is this work-for-hire (you own the master) or does the producer retain a share? Are there backend points (royalty percentage)? Does the producer get a composition credit and split?

Management agreement. Terms with your manager. Key questions: What percentage do they take (standard is 15-20%)? What income is commissionable (all music income or specific streams)? What is the term length? What happens when the agreement ends (sunset clauses)?

Sync license. Terms for placing your music in visual media. Key questions: What is the fee? Is it exclusive or non-exclusive? What is the usage term? What territories are covered?

Label deal. Terms with a record label. Key questions: Who owns the masters and for how long? What is the royalty split? What is the recoupment structure? What are the option periods? See Record Deals Explained for the complete guide to evaluating label offers.

Publishing deal. Terms with a publisher. Key questions: Are you assigning copyright or just administration? What percentage does the publisher take? What is the term? What are the reversion clauses? See Music Publishing: How It Works and When You Need a Publisher for the full breakdown.

For detailed guidance on copyright transfer and what you are giving up in these deals, see Music Copyright Basics.

Red Flags in Any Contract

"In perpetuity." This means forever. If a contract assigns your rights in perpetuity, you never get them back. Some situations warrant this (a sync license for a specific use), but master and publishing rights in perpetuity should be evaluated very carefully.

Broad exclusivity. "Exclusive rights to all musical works created during the term" means everything you make belongs to them, including songs that have nothing to do with the deal. Push for narrow exclusivity limited to specific projects or recordings.

No audit clause. You should always have the right to audit the other party's books to verify you are being paid correctly. If a contract does not include an audit clause, add one.

No termination clause. Every agreement should define how it ends: by expiration, by mutual agreement, or for cause (breach of terms). If there is no way out, do not sign.

Vague compensation language. "Net profits" can mean almost anything depending on how expenses are defined. If the contract pays you based on "net," make sure it defines exactly what is deducted before you get paid.

When to Use a Lawyer

Always for label deals, publishing deals, and management agreements. These are multi-year commitments that affect your income and rights. An entertainment attorney's review costs $500-$2,000 and can save you years of regret.

Usually for sync licenses over $5,000, co-publishing agreements, and any deal involving rights transfer.

Optional but smart for producer agreements, collaboration agreements, and distribution terms if you are unsure about any clause.

Many entertainment attorneys offer a free initial consultation (15-30 minutes) and can review a standard contract for a flat fee. This is not an extravagance. It is a business expense that protects your most valuable assets.

The Business Setup Checklist

If you are taking your music career seriously, these are the foundational steps. Most can be completed in a single weekend.

Week 1: Structure and money

• Form an LLC in your state (or have your manager/attorney do it)

• Apply for an EIN (Employer Identification Number) from the IRS (free, takes 5 minutes online)

• Open a business bank account with your EIN

• Get a business credit card

• Set up basic accounting (spreadsheet or Wave)

Week 2: Revenue collection

• Register with a distributor (if not already done)

• Register with your PRO (ASCAP or BMI)

• Register with The MLC

• Register with SoundExchange

• Register each released song as a work with your PRO and The MLC

Week 3: Protection

• Register your releases with the US Copyright Office

• Create a split sheet template for future collaborations

• Identify an entertainment attorney for future contract reviews

Week 4: Operations

• Set up a system for tracking income and expenses

• Create a folder for contracts (digital or physical, stored securely)

• Research quarterly estimated tax obligations

• If earning $20,000+/year, find a CPA or tax professional

This is not glamorous work. But every artist or team that skips it ends up doing it later, usually under pressure, usually after losing money they should have kept.

Common Mistakes

Not separating personal and business finances. Commingling funds makes tax prep a nightmare, voids LLC liability protection, and hides whether your music career is actually profitable.

Ignoring taxes until filing time. Self-employment tax alone is 15.3%. If you earn $30,000 from music and have not set aside money for taxes, you owe roughly $4,600 in self-employment tax alone, plus income tax. Quarterly payments prevent the surprise.

Signing contracts without reading them. Every clause exists because it benefits whoever wrote the contract. If you do not understand a clause, do not sign until someone explains it. That someone should be a lawyer, not the person who sent you the contract.

Not keeping receipts. A $5,000 deduction without documentation is a $5,000 deduction you lose in an audit. Keep digital copies of everything.

Waiting until "it gets serious." The business foundation is cheapest and easiest to set up when the stakes are low. Forming an LLC after you have already signed contracts as a sole proprietor creates complications. Set it up early.

Frequently Asked Questions

Do I need an LLC if I am just starting out?

Not immediately, but sooner than most artists think. If you are playing shows, signing any contracts, hiring collaborators, or earning more than a few thousand dollars, the liability protection of an LLC is worth the small setup cost. The earlier you do it, the cleaner your business structure will be as you grow.

How much should I set aside for taxes?

A safe rule for most artists: set aside 25-30% of every payment you receive into a separate savings account earmarked for taxes. Adjust based on your actual tax bracket after your first year of filing. Overpaying into the reserve is better than underpaying and facing a surprise bill.

Do I need a manager to handle the business side?

Not necessarily. Many artists manage their own business operations early on, especially with the help of accounting software and a good attorney on call. A manager becomes valuable when the volume of opportunities, negotiations, and administrative tasks exceeds what you can handle while still making music. See When to Hire a Music Manager for a deeper breakdown.

Can I deduct music gear I already owned before starting my business?

In some cases, yes. If you start using personal gear exclusively for business, you may be able to deduct its fair market value (not the original purchase price). Consult a tax professional for your specific situation, as the rules around personal-to-business conversion of assets are nuanced.

What is the difference between an accountant and a bookkeeper?

A bookkeeper records and categorizes your transactions (income in, expenses out, account balances). An accountant or CPA interprets that data, prepares tax returns, advises on deductions and strategy, and represents you in case of an audit. Many artists need a bookkeeper monthly and an accountant annually.

Read Next:

• Music Copyright Basics

• When to Hire a Music Manager

Run Your Career Like a Business:

Orphiq keeps your releases, team coordination, and marketing organized in one place so the operational side of your career does not rely on memory and scattered notes.