When you are a budding musician with your sights set on playing the world’s largest stages, we agree that your attention should be solely focused on honing your skills and developing your craft! But as your career blooms and your income increases, the financial administration will also become more and more complex.
Therefore, it is of absolute importance that you begin to put a plan in place that will facilitate your ongoing success and protect your hard earned dollars..
How? Well, broadly this will begin with getting your accounting processes in place from kick-off, which can save you a massive amount of time, cash and frustration later in the game.
Over the years, I have worked with many musicians and performing artists, most of who will approach Amplify 11 when they feel like they have lost control of their business finances. This often means there is a lot of work required by us to get their financial affairs back on the right track.
To help you to avoid the accounting pitfalls of running your business, here are the top 5 solutions to common issues and some tips on how to be better prepared.
1. Have a dedicated bank account for business income!
If you are mixing your personal finances with your business finances than you are just making life more difficult for yourself.
Why? Because the Australian Tax Office requires you to have a separate bank account if you are operating as a company, partnership or trust – so, not having a separate bank account for your music business immediately puts you at risk of penalty by the ATO.. not cool, guys!
On the other hand, if you are operating as a sole trader, there is no ATO requirement to have a separate bank account; however, if you are using one account for both business and personal finances, it is your responsibility to be able to clearly separate and identify any personal payments or expenses.
Setting up a dedicated business bank account for your music business should be the first thing you do when you establish yourself as a band or self-employed musician. Doing so will allow you to clearly and easily show your business finances separate from your personal finances and give you the added flexibility to extract information needed to meet your tax and reporting obligations.
To help you get started, here is a comparison list of current small business bank accounts on offer in Australia!
2. Sort through your paperwork before it is too late!
Unfortunately, we see this all too often. The stack of receipts and invoices piles up in an old Doc Martens shoe box and musicians get further and further behind to the point where they never have the time to get in and get it done.
Eventually, they end up calling in the support of an accountant who will inevitably have to charge an increased fee to allow for the additional time taken to sort through and categorise all the paperwork.
In order to save you the time, frustration and additional accounting costs, we recommended implementing a simple filing system as a bare minimum! This includes having 3 files:
- One for expense receipts (sorted alphabetically)
- One for invoices (sorted alphabetically)
- One for bank statements (sorted chronologically)
This simple strategy is more suited for musicians and artists who are just starting out and it is sure to get you off on the right foot in managing your business finances. It will also ensure you are meeting your record-keeping obligations for tax purposes in Australia and allow your accountant to offer a more cost-effective service to get your accounts and taxes prepped.
As your business expands, we recommend you give some consideration to moving to a cloud-based accounting software system. This is a whole new ballgame and you can find out more about this here.
3. Be aware of your tax obligations in Australia!
If you are a performing artist who is at the point in your career where you are consistently playing gigs, then first off – congratulations to you on this achievement! We know firsthand that mastering an art and putting yourself out there for the world to see is a tough road, so we are proud to see you make it this far!
So, because it is your intention to make money from performances, it can no longer be deemed to be a hobby; therefore, in the eyes of the Australian Tax Office, you are running a business and you are required under tax law to register for taxes and lodge annual tax returns to report your income derived from performing music.
If you do not notify the ATO that you are trading your performances for money, you may find yourself in a bit of shit as the tax office has the authority to charge penalties (and interest on those penalties!) for your failing to report your income. Worst case scenario, you may find yourself at risk of prosecution and although Johnny Cash had a good time playing shows in prisons, we are fairly certain you will not have access to instruments in this situation.
There are a few different taxes that apply to different parts of operating a business in Australia.
4. Budget for future tax bills!
Following on from the above mistake of not registering for tax in Australia, another common roadblock we frequently see with self-employed musicians and artists is checking the boxes for tax registrations but then getting hit with a tax bill at the time of tax return lodgement and not having the available cash on hand to pay that tax bill when it is due.
To put it short and sweet, if you are self-employed (in any respect) then you must pay your own income tax on any profits you have made over the duration of a financial year! We cannot stress enough the importance to make sure you budget for this as you go (i.e. month to month) so you don’t get hit with any shock tax debts and the inability to pay that debt due to lack of cash.
We recommend opening up a second savings account (linked to the business transaction account you opened when you started your music business – see point #1 above!) and transferring a percentage of approximately 30% to this savings account as income lands in your hands. Be sure to make this savings account for tax payments only and keep it off limits for other expenses and purchases. This way, when you have a tax debt to pay at the time of lodging your tax return, you have progressively made the savings contributions throughout the financial year to pay this debt when it is due.
As your business grows, the ATO may require you to pay income tax in quarterly instalments known as the PAYG system. At this stage, Amplify 11 can assist you with your tax planning and quarterly lodgements but in the meantime, you can get an idea of how much tax you might have to pay with this ATO PAYG Instalment calculator.
5. Get help from an awesome accountant (who understand the music business!)!
There will come a point in your career where you will greatly benefit from hiring an awesome accountant to take care of the financial side of your business and who will provide assistance with registering you with the ATO, calculating how much tax to pay and when to pay it, as well as making sure all your income and expenses are neatly recorded, categorised and compliant.
When it comes to hiring an accountant, you must do your homework and ensure that they hold the relevant accounting qualifications and that they have experience working in the music and entertainment industry.
A good accountant who specialises in the performing arts industry will provide so much more value than you think! They will act as a sounding board to your ideas, they will have access to other professionals in the industry and overall they shall quickly become a key player in your entourage, helping you to achieve your personal and business goals.
Amplify 11 are accountants for musicians and all creative businesses! We live and breath the creative world and have the expert insights to ensure the tax man doesn’t throw you into jail as well as keep your business on track for continued success when we crank it up to 11! Contact us today on our website here!