Our band formed an LLC last year. Now, in January of the following year, it’s time to put it to use. The point of the LLC was to fairly distribute taxes on earnings to all band members. The tradeoff for that is maintaining the books, and filing the right paperwork with the IRS for the band LLC taxes.
Note: I’m not a tax advisor, an accounting expert, or an attorney; nor do I know the specific laws governing an LLC in your state. So caveat emptor for the tips in this article.
Recap: why a band LLC?
You’ve likely received a Form 1099 if you tend to be the payee for gig check. A business must send out a Form 1099 (usually 1099-MISC) to anyone they paid more than $600 during the previous year. If one band member normally takes the check from the venue, even a single gig can mean a 1099 from the venue. In other words, that person ends up getting stuck with the taxes. Those taxes can easily eat up most of what that band member made on the gig!
Using an LLC as a pass through entity helps to avoid this inherent unfairness. The LLC doesn’t itself make any money; it simply receives and distributes money. The LLC gets paid by venues, and then pays out its members (the band members). The individuals then pay taxes on the income. And yes, this is all not only legal — it’s a good idea!
Handling the books
An LLC like a local band usually functions as a partnership. It also typically uses cash accounting, the simplest type of accounting. The LLC records income when received, and records expenses or distributions when paid. For a local or regional band, this setup is both simple and ideal. It also makes the band LLC taxes a snap. And it only requires two things:
- You need to maintain the accounting “books” for the band regularly throughout the year. This is pretty easy. You can use either a standard ledger, available for a few dollars at an office supply store, or online tracking like Google Sheets. (I do not recommend saving your band’s books as files on your computer. They could then be accidentally erased or lost if your equipment fails. A cloud service like Google Workspace is ideal.)
- You need to observe tax deadlines and file the band’s paperwork timely. Just like the forms you receive from any day job you hold, bank, brokerage, etc., the band should send its members their tax forms. It’s best to do this before January 31, so your band members can work on their taxes with all their information on hand. You also have to send the band LLC’s own paperwork to the IRS by March 15.
You also need the LLC members’ social security numbers and addresses. Often you’ll already have those from putting together the LLC formation paperwork and operating agreement.
A pass through LLC doesn’t pay any taxes on income. Instead, its income is divided up and distributed to its members according to their operating agreement. But even a simple LLC like this still must file a Form 1065 reporting the income to the IRS.
Forms, forms, and more forms
The form is long and it can look scary. The instructions are even longer and scarier! But don’t despair. Doing the band LLC taxes turns out to be easy. The Form 1065 scary portions don’t apply to just about any “normal” small band. There are many reasons for that. One of the biggest reasons is your band is not likely to hit the minimum income for the complex bits to apply. That is, unless the LLC brings in $250,000 for the year, or has $1 million in assets. In which case, you can probably afford to pay a tax professional to handle this stuff!
Along with the Form 1065 you also file a set of attached Schedule K-1 forms. Notice that K-1 is separate and distinct from Schedule K included on Form 1065. The K-1 shows an LLC member’s earnings (or contributions) to the LLC. The members of your LLC are most likely individuals, and therefore each member’s K-1 reports earnings as self employment income.
Of course, the band members may not have used all the income for the LLC. In our band’s case, we paid subs to sit in for certain gigs. Those payments are also declared on Form 1065 as wages that went to other non-member individuals.
Who gets what
You send the Form 1065 and all the Schedule K-1 forms to the IRS. Where you send them depends on where your LLC is based. The IRS tells you how to determine the right address. These are more or less informational, and the IRS doesn’t look for a check from the LLC. The whole set of forms allow the IRS to know where the various income and deductions went.
You also give each band LLC member a copy of their K-1. They then use that K-1 as they file their own taxes. Their taxes will thus include the self employment tax on these earnings. Now each band member is responsible for taxes on their own earnings. This is definitely a fairer situation!