Julie writes in to ask about paying taxes on items sold through iTunes. It is a slightly different question compared to the technical stuff I usually deal with, but I was happy to help out.
Here is Julie's slightly modified text:
This may sound odd, but I saw your post on a message board about iTunes. Im a singer songwriter, and I want to get my stuff up on iTunes. I don't have a label, and will be doing this all myself from creation, to publishing, duplication cost..etc. Will I have to pay taxes on income earned from each download? I know the cd sales I sell out of my car are mine- but what about the money that comes to me from each download? does the IRS track that and come after me for each one? im so new at this, and any info would be helpful. Thanks Julie
Disclaiming this response with the fact that I am only aware of US based laws and I am not a lawyer or accountant...
Most likely you'll have to pay taxes. As a business owner myself, I budget for 40% of my income to go the government. As a self employed individual, you pay the same taxes you do as if you had a day job (~33%). If you had an employer, that employer is paying ~7.5% to Social Security in your behalf. If you're self employed, you pay that amount yourself.
You also have to pay taxes on the CDs you sell out of the back of your car. They qualify as income.
The benefit of claiming this income on your taxes is that you can also claim deductions. For example the cost of printing the CDs is tax deductable. If you buy equipment such as a microphone, guitar, mixer, guitar strings, or mic stand that is tax deductible. If you drive a vehicle to and from a gig that mileage may be tax deductible. If you buy clothes / costumes for your performance that is deductible. If you rent a professional studio or hire a producer / mixer / etc... that is all valid business expenses and deductible.
In my 10+ years of being in a band, I think I never had a year where the band income was more than the band expenses. One year we had an operating profit, however equipment we were deducting over time offset that profit for tax purposes. That is why I am no longer trying to be a professional musician. I didn't have the people skills to be good at the business side of it.
Tons of bands play dive bars once a month for $300 a night and split it between 5 people. I doubt the IRS would go after those people (But don't quote me on that). On the other hand, if you're playing 200 shows a year, have thousands of fans, and are generating a half million a year they'll probably notice you.
A lot of musicians want to wait until they make enough money to be noticed before they address this issue. However, that seems wrong to me because a lot of the tax benefit is going to be now / today when you're struggling, spending, and making almost no money.
You're going to want to talk to an accountant and/or lawyer for specifics in your area, though.