First, you will have to pay taxes first... I don't know how it work in the US but if it is not done yet, you should declare your activity (as a bunch of freelancer ? a limited ?) and the income (in France we also have to pay social taxes and other taxes).

Then, if their is money left, refunds each one for the expenses directly related to your project (you talk about licences, server etc, so you must have kept the receipt -maybe the bank report will do this time ?-)

This is actually a very good point. I hadn't discussed taxes with any of my students. I mean no disrespect to them, but I didn't expect any to get over the minimum income requirements for taxation in the US for one of their first games. According to Efile.com, thats 5,800$ per dependant individual in the US. (2,000$ annual dependent individual for Wisconsin) (Adults are typically in ranges closer to 9,750 and up.)

However, as a clarification for the US order on this.

1) Clarify if you made enough to require filing taxes (per individual, presuming the company is not real and everyone is counting it as personal income)

- This may cause you to distribute the funds differently on Dec 31st, so that no one has to pay taxes. I.e. I'd rather make 9,749.00 and pay no taxes than make 10,500.00 and pay 10-50% on taxes. (non-W2'd income can be up to 50% taxed, as no corp is covering part of it) If you agree to divvy up funds at the end of the year, then there shouldn't be any issue here, i.e. no exchanging funds.

2) Cover Operating costs. for personal expenses made, pay those out now. Individuals if taxed, will need to report the expenses, which will be deducatable, and this payback money essentially doesn't get taxed.

3) Now split the pay out to each individual how ever you agreed to divvy it up.

4) Now individuals should worry about taxes if need be.

To keep things lower level, (I.e. no corporate taxes, etc) I recommend not having an official treasury, but that each of the key members/agreed owners of the product, decide to set aside a specific amount of funds each, and equally pay for any "project expenses", like licensing and servers.

And of course, keep good financial records, so if you need to do taxes, or incorporate, you have solid records.

Of course incorporation adds a layer of legal protection for the individuals. If your game allows a hacker to gain access to a server farm and steal hundred of ID's/credit cards, the lawsuit would target the individuals unless they are incorporated.

*I welcome any corrections on what I just said here. I'm pretty well certain everything I said is true, but I would hate someone to depend on this only to find out I was wrong about some crucial issue.

If you do it a certain way, in the USA each person could pay personal income taxes, perhaps as agents working for a Limited Liability Corporation, however the company still has to pay taxes.

And Tax Fees. Fees like getting TurboTax Business, H & R Block, or another tax service. If everything the company makes goes out to fees to pay contractors, then they don't have any taxes to pay.

The first year I was running my school, I took a $20,000 hit on expenses and made less than 1000 back. I ended up with a nice tax return though, as the taxes work both directions.

Dan,

I'm afraid you have a couple of errors in your 10:49am post...

This may cause you to distribute the funds differently on Dec 31st, so that no one has to pay taxes

The income is based on when the money is earned/collected, not when it 'distributed'-- i.e. if someone buys your game on Dec 1 2012, and you get the money on Dec 1 2012, you have to declare the income in the tax year 2012. (Note: yes, there is something called 'accrual' accounting that would have things work differently, but i very much doubt you'd be doing that).

{edit for clarification}.

Someone has to have provided their SS number to Steam/Apple, etc in order to get paid from end customers. That person has to declare the income in the year it comes in. If that person then pays others after Dec 31, those other people would declare the income when they receive their checks.

I'd rather make 9,749.00 and pay no taxes than make 10,500.00 and pay 10-50% on taxes.

Although 9,750 is indeed the cutoff for being required to file a Tax return (5,800 for dependents) on normal income, there is a big exception to that. If someone has self-employment income of more than only $400, they are required to file. Since game-related income is self-employment income, if someone made more than $400, they would need to file. If you look back at your e-file link, read the part under "Special cases that require you to file a return"

Also, if any of your students wanted to file a tax return (even if the game made less than the minimum), they would need to know how to properly report any income from the game. (FYI, one reason they might want to file a tax return is if they have a part time job elsewhere and want to file to get any refund that is due)

To keep things lower level, (I.e. no corporate taxes, etc) I recommend not having an official treasury,

I'm not sure what you mean by 'official treasury', but by all means you very much should have a separate bank account for the game and its expenses. I.e. all money the game makes goes into it, and any payments for all costs (equipment, servers, people, etc.) get paid from that account. Whether or not you have a separate account makes no difference at all as far as taxes are concerned. But it makes it massively easier to manage what the costs are, and to deal with taxes when the time comes.

Although taxes may not be very interesting , it can be a very good way to introduce students to the importance of record-keeping and the basics of income/expenses.

One final note on taxes: it may be that, if the primary goal of your game is not to make money, it could be considered a hobby and not a business. You'd really need to talk to an accountant for that.

Back to your original question:

They had no real discussions on money..

At some point, they decide to release, and suddenly money comes pouring in, however unlikely.

How does the team settle where the money goes?

2 things can happen. The team comes up with something 'fair' among themselves, or (if they are unable to do that), a 3rd party decides it for them (a judge or an arbitrator).

Since I get the feeling from your posts that this is student-related, I'd suggest that an even n-way split would be 'fair.' Then for the next game, they may want to discuss whether that actually was fair or not. I.e. if some team members worked much harder than others, or just had different jobs (eg programmer vs composer) should that require different pay percentages?

FYI, the way a judge would probably decide would NOT be an even n-way split. What typically happens is that the judge would look at the different roles, what those roles typically get along with effort/hours put in etc, and assign percentages based on his/her best judgement.

@bschmidt1962 +1, thanks for the clarifications. Particularly with the 9,750 down to 400 correction. That was also a good point on the receiving of funds. That most any store is going to require someones records to be hooked up to the income.

I want to continue this discussion, but geared more towards how to discuss the distribution of funds. Primarily, I'm considering this as an initial plan, but I'm open to hearing about any uniqueness for a team who is already receiving funds.

Since its a slightly different topic, I've posted it on another thread: http://www.gamedev.net/topic/639339-how-to-split-the-money/