Managing Royalties and Residuals in Entertainment Accounting

Entertainer group on stage

When it comes to the entertainment industry, there’s far more to the game than giving your audience the experience of a lifetime. Artists, performers, and production companies need to take on the critical aspect of managing their finances well. This is essential to stay  profitable and compliant. Part of this includes managing royalties and residuals and making accurate and timeous submissions to the IRS.

Accounting best practices for managing royalties and residuals

Royalties and residuals are forms of payment that entertainers receive for the use of their creative works, performances, or appearances.

Royalties are payments made to artists and other creative individuals or entities for the use or exploitation of their intellectual property. Residuals are payments made to performers and other talent for the ongoing use of their work in films and other media formats. These represent an essential source of income. It is thus necessary to accurately track these figures to ensure financial stability and regulatory compliance. In this article we take a look at some of the ways in which to effectively manage royalties and residuals in the entertainment sector.

Be proactive in including royalties in your budget plans

While your entertainment business may consider its core entertainment offering as its main stream of income, royalties and residuals are valid forms of payment in the entertainment industry and should be treated as such by including it in the income projections of your business. This will allow you to better align business expenses. It will encourage an accurate growth strategy and maintain financial stability. Taking all streams of income into account in budget projections makes for a less messy accounting reconciliation process.

Track income from royalties reliably

Making use of reliable accounting software that can easily track, categorize, and report income streams from various sources is beneficial. Have peace of mind when it comes to staying abreast revenue from music sales, streaming platforms, licensing and more. Automation tools streamline the royalty and residual management processes. Accounting software specifically designed for the entertainment industry can automate calculations and facilitate transparent reporting to all stakeholders.

Perform regular royalty reconciliations and audits

Royalty reconciliations ensure that projected royalties and residuals align with actual payments received. Reconciling statements from record labels, streaming platforms, and other revenue sources helps identify any discrepancies. It is important to have coinciding data from royalty tracking software and reconciliation statements for your business. Your business is liable for taxes on all revenue received. If there is a discrepancy between quoted amounts and actuals you may be at risk with the IRS. 

Compliance with royalty and residual regulations

It is important to stay abreast the ever-changing royalty and residual regulations in the entertainment industry. This is especially important when it comes to revenue from royalties across multiple states. Different states may have specific requirements and tax apportionment liabilities. Maintaining compliance ensures that all parties receive their fair share and minimizes the risk of financial repercussions and legal repercussions.

Establish clear royalty-sharing agreements with all artists involved

While it may not be directly tied to the day to day accounting for royalties, clearly managing the expectations of all parties involved in producing the final piece of music or art is crucial to protect the longevity of your business and revenue. Artists, performers, producers, and distributors need to have a thorough understanding of the payment terms, calculations, and distribution processes to safeguard your entertainment business from legal action and to avoid any misunderstandings or disputes that can place business production on hold.

Managing royalties and residuals in a way that is both profitable to your business and compliant with regulations can be a daunting task. Partnering with experienced entertainment accountants can provide invaluable support in this regard. It can save you money in messy accounting records, and help you with accounting software implementation.

At Fusion, our CPAs are have specialized knowledge of industry-specific accounting practices, tax regulations, and royalty distribution methods. We can help you navigate complex contracts, optimize financial processes, and provide strategic insights to maximize the financial performance of your entertainment industry.

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