and well I picked him because he's the best, quick, efficient, and high quality.
Well, it sounds like you really value his work. I would put that down on the side of at least trying to work with his request.
On the other hand, he's made a lot of money off me already on a project that I may never see a profit from.
Although I can totally understand why you feel this way, I think it's the wrong way to be viewing things. You are paying him in hopes that you will see a profit from your game. It's of little concern to him whether the game succeeds or not because he doesn't have a direct stake in the game. Personally, I would avoid bringing this up, as it may offend him. From his perspective, he's made quality work that he felt he should be paid for, you did pay him for, and he expects to continue to be paid for. It probably seems reasonable that as he starts to realize his value in your company that he would want to be paid closer to his perceived value. Additionally, having a bigger stake in the success (of future projects at least) might also encourage him to try harder to get the game to it's full potential. The same concept also applies for other highly valued members on your team.
Everyone else on the small team is paid a wage and isn't getting a percentage.
This could really fall into two camps: Those that don't feel it plays any relevance in how others are paid: "Well, if they want better pay, they should ask for it like the artist has." and the other camp of "Equal input, equal output." To me, if everyone else is fine with being paid less, let them continue to be paid less but I would not keep them in the dark of this fact. That is, you can keep them in the dark but if you are all somewhat friendly with each other this could be seen as a betrayal or serious insult.
Its all my financial burden and all my profit if there is any.
Again, this is very much a divided camp thing. "Well, it's your own fault for putting yourself into that situation. Why should someone else suffer in the long term for your poor choices in the short term?" vs a more compassionate "The bigger the risk, the bigger the reward" mentality. Personally, I think you should have a bigger slice for a that reason, but it shouldn't necessarily cut everyone else out of the profit sharing, as I would assume everyone did work full time, and very hard, on the game.
If you're wondering about contracts, its all very informal. No one signed anything. I just write a checks at the end of the week.
If you plan on making semi-popular games, I would highly, HIGHLY suggest coming up with a more formal plan for future projects (and this one too, if it isn't too late!), assuming your company is more than a single person (yourself). Going to court can be painful, drawn-out and expensive. This is compounded exponentially by having literally zero paperwork to prove how any of your business was run, who paid what to who, when how, and how much. You might not need a team of accountants counting every penny, but it sounds like you do not have any kind of tracking in place right now which could get extremely hairy if law suits are ever filed against you. Even if they are all close blood relatives, I would very highly recommend working on getting something formal put into place immediately. Money is the lifeblood of your company. If you consider this to be your "real life" job, then you need to treat it like one, and protect it just like anyone else would, regardless of what industry it's in.
Here's some other things to consider too: Have there been any increased monetary problems some of your teams might be dealing with? Maybe someone has a baby on the way? Drug/drinking problems? Gambling? Maybe a family member died and they are struggling to get their affairs in order. Maybe they're going through a nasty divorce or having legal troubles. There's all kinds of things that could have prompted your artist making this request, and if you have a somewhat large team, the chances are kind of high that at least someone on your team is going through a some kind of problem like the one's listed above but have just been too afraid to mention it. Ask. Ask how they are doing and see if there is anything that you can do better to help relieve some of the stress that everyone must be under right now. Are there any monetary goals you want to set up after the games release? Maybe break 5k and everyone gets ice cream, break 100k and everyone gets an extra week's pay, etc. Sometimes little things can be huge morale boosters. Ask them all if they are aware of how all of this is supposed to work, or how it might have worked in previous projects.
Whatever you do: I would HIGHLY suggest sitting everyone down for a few hours. Get some pie charts and shit with the current breakdown of stuff like weekly paychecks. Break down exactly who has a cut of what and how much. It sounds like you're at 100% share right now...say your game makes 10 million dollars. Does anyone get a bonus for that? Why or why not?