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Understanding Royalty Income and How it is Taxed

Understanding Royalty Income and How it is Taxed

Anyone with a creation like art, music, literature, etc., which someone else used and profit from it, there will be royalty income to the owner. This means that if anyone uses your creation to make money, you will get money. The payment from royalty income arises due to the use of intangible work. 

An artist, for instance, can have their royalties paid in various ways. It might be through the sale of the work (property) to the investor in which a fixed portion of the income will go to the owner. Also, one can get a royalty anytime someone profits from your work. Uncle Sam considers your royalty as income, irrespective of why or how you received it. As a result, it must reflect as income on your return. 

There are many factors; however, that affects the taxes paid on royalty like:

  • The nature of the creative work: a trade or school

  • The form of income and timing

  • The owner of the property (maybe a corporation or an individual)

While royalty taxes do not come with the blanket equation, you will report royalties as self-employment income which will have a pretty higher tax rate. Royalty that comes from a single-time earning (something not your primary income source) will be reported on Schedule E of Form 1040. Here are some examples:

You wrote a book and published it and you did not revise it. With this, you are not self-employed as a writer based on the government's classification. Any accruing royalty will not be classified as self-employment income using Schedule C. However, this will be reported using Schedule E – supplemental income. On the other hand, a full-time writer with many revisions of the book will be considered self-employed as a writer. Such a person will report the royalties under Schedule C – losses and profits from Business Income. 

There are times an artist will get advanced royalties before completing work. For instance, a company might make an advance royalty payment of $15,000 to own a right to 15 songs alongside a portion of the sale's profits. Should the song not make any money, the song owner still owns the $15,000. Even the payment is classified as advanced royalty; Uncle Sam believes the fund is for services rendered, which will be reported on Form 1099-Misc. 

With online streaming, musicians earn some royalties anytime anyone streams their song on Pandora or Spotify platforms. Royalties from streaming go to the songwriter and performer, while for songs played on the radio, only the writer is paid. 


Reporting Royalty Income Taxes 

Your entire royalty income will reflect on Schedule E, Form 1040. The form is called Supplemental income and losses, and a two paged form where one can report income from trusts, S corporation, partnership, real estate, etc. There is no specific schedule made for this as the proportions of Americans making money from royalties are not huge. 

On getting your 1099 MISC, the royalty income will go to Line 4 and column A, B, or c, or schedule E. different columns stand for various properties one is reporting while line 1b reveals the type of property. 

Uncle Sam limited Schedule E to three properties because of two reasons. 

  1. It allows them to keep things simple and reduces the time the agents will have to spend examining each form. 

  2. Also, the properties will be a pretty decent estimation of the number of assets that someone who is not an active royalty earner will have.

Uncle Sam will need you to decide if you are a sole proprietor and that your only business is centered on mineral rights for someone with more than three properties. However, if you own a couple of properties and you are not a sole proprietor, you can employ a series of Schedule E, as many as you need. 


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