There are tons of ways to have a good time in NYC. Sometimes things pop up in front of you when you least expect it. One thing you can expect to see is professional quality music, dance, puppetry, and a ton of other kids of performance art on the subway. Not don't get me wrong, not all subway performers all alike, but at the right spots at the right time of day, you can see some quality live music on the subway.
Far and away the best subway stop for entertainment has to be Union Square. There are several spots that are frequented by extremely talented musicians. You can see full bands like the Rhythmatics, an ensemble featuring three saxophones, and three drummers, or solo artists like the guy who plays the accordion on the NQRW line platform.
My personal favorites are the bucket drummers on the L platform. One guy and one girl play the buckets sometimes accompanied by other musicians, and/or dancers. The acoustics of the subway combined with the tenacity and skill of the drummers make for world-class entertainment.
Herald Square showcases a 5 man dance group headed by a Michael Jackson impersonator. They put on an amazingly entertaining show featuring break-dancing, acrobatics, and the afore-mentioned Michael Jackson.
The thing about subway performers, is they pop up all over the place. You never know where you might see an amazing performance. The other thing about subway performers is they aren't just out there to have fun. They're working hard to put on a show for you; reward them with a dollar or two. If you're in a rush, and you're running to catch your train, it's understandable to not give a donation. A lot of the artists frequent the same spots, so try and remember for next time.