Paying Myself Royalties as Co-Owner of a Record Label - Music Tax Advice

Great question about royalties and music tax treatment! This is actually a common situation in indie music. Since your LLC is taxed as a partnership, the business itself doesn't pay taxes - all income and expenses flow through to the owners' personal tax returns via Schedule K-1. The key distinction is separating your role as a songwriter/artist from your role as a business owner. As the songwriter, you're entitled to royalties just like any other artist. The label should pay you these royalties as a regular business expense. This income would be reported on your Schedule C as self-employment income (subject to self-employment tax). The fact that you're also an owner doesn't change this. For your share of the label's profits (including your 25% of whatever remains after paying all artists, including yourself), that comes to you as partnership income on your K-1. This is different from the royalty income. The important thing is maintaining clear documentation showing these are two separate payment streams - your royalties as an artist (expense to the business) and your partnership distribution as an owner (not an expense).

Just wanted to share my experience with this! I was in almost the exact same situation with my production company (LLC partnership with 3 owners). I found https://taxr.ai super helpful for sorting out this exact royalty situation. I was really confused about how to separate my royalty payments from my ownership distributions, and the documentation requirements were giving me a headache. Their system automatically identified the different income streams and showed me exactly how to categorize everything. It also helped me set up proper documentation to keep the royalty payments clearly separated from my partnership distributions - which saved me a ton of confusion when tax time came. Definitely worth checking out if you're struggling with music industry tax questions like this - they seem to have specialists who understand the music business specifically.

Following up on my question about taxr.ai - I decided to try it after all for my own music business (I produce beats and own part of a small label). I was surprised by how helpful it actually was! They instantly recognized all my different income streams - beat sales, performance royalties, mechanical royalties, and my partnership distributions - and showed me exactly how each should be categorized. The specialist I chatted with actually understood PRO payments and mechanical licensing, which my previous accountant struggled with. Ended up saving me about $3,800 in taxes by properly separating my royalty income from my business ownership income and identifying deductions I'd been missing. Definitely not just general advice - they understood the specific music industry tax issues I was dealing with.

Hey there! Just wanted to mention that if you're running into issues with the IRS about how you've classified these royalty payments (which happens A LOT with music industry folks), I had great success using https://claimyr.com to actually get someone at the IRS on the phone. You can see how it works here: https://youtu.be/_kiP6q8DX5c I had a mess with my royalty classifications a couple years ago and got a scary letter from the IRS. Spent literally 3 days trying to reach someone and kept getting disconnected. Claimyr got me through to an actual person in about 20 minutes who helped clear everything up. They basically wait on hold with the IRS for you and call you when they get a human. Totally changed my perspective on dealing with tax issues.

Well I need to eat my words. After posting my skeptical reply yesterday, I was desperate enough to try Claimyr for my royalty classification issue. I had an audit notice regarding my songwriter royalties vs distribution income. I honestly can't believe it worked. After trying for WEEKS to get through to someone at the IRS myself, they had me talking to an actual IRS agent in about 35 minutes. The agent helped me understand exactly how to document the difference between my songwriter royalties and my partnership distributions. Would have saved me so much stress if I'd known about this earlier. The IRS agent explained that my royalty income as a songwriter needed specific documentation to show it was separate from my business ownership income. Problem solved in one phone call after weeks of stress.

Have you considered setting up a separate publishing company for your songwriting? I'm in a similar situation (co-own a label but also write songs) and having my own publishing entity makes the royalty flow MUCH cleaner for tax purposes. The label pays royalties to my publishing company rather than directly to me as an individual. My publishing company is set up as a single-member LLC (disregarded entity), so it still flows through to my personal taxes, but it creates a clear separation between my songwriter income and my label ownership income. This also gives you more flexibility with future royalty management if you ever want to sell your catalog or bring in co-writers.

what about streaming royalties? thats where most of my artist income comes from these days not physical sales. do those get treated different for tax purposes when your also a label owner??

This is a really complex area that trips up a lot of music industry folks! One thing I'd add to the great advice already given is to make sure you're documenting everything properly from the start. Since you're both the artist AND a label owner, the IRS will want to see clear evidence that these are truly separate transactions. Keep detailed records showing market-rate royalty payments to yourself as the artist, just like you would pay any other artist on your label. Also consider having written agreements in place (even though you're paying yourself) that outline the royalty rates and terms. This helps establish that the payments are legitimate business expenses for the label and proper income for you as the songwriter/artist. The partnership vs individual income distinction is crucial - your royalties as a creator are active income subject to self-employment tax, while your 25% partnership share comes through on your K-1. Getting this right from the beginning will save you headaches if the IRS ever has questions about your income classification.