What Is Royalty Income and How Is It Taxed?

By: Debra Ronca  | 

Taylor Swift
Taylor Swift performs onstage during the 56th Grammy Awards. Singers usually get royalty income from their music whenever it's played, bought or used in commercials. Michael Tran/FilmMagic/Getty Images

If you've ever created anything — like music, art or literature — and someone else profits from its use, you may be entitled to royalty income. In other words, if others use your work to make money, you get money. Royalties are payments for use of intangible works (not services). You can also receive royalty income through investment in a mineral operation, like gas or oil.

Artists can negotiate their royalties in different ways. For example, you can sell your work (also called property) to an investor in return for a constant percentage of royalties on the revenue the investor makes. Or you can simply receive a royalty any time anyone uses your property to make money (called licensing.) No matter how or why you receive royalties, the federal government sees them as income, and expects you to report that income on your taxes [source: IRS].

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Taxes paid on royalty income depend on many factors, including the following:

  • Whether the creative work is a trade or a business
  • The timing and kind of income received
  • Who owns the property (an individual or a corporation, for example)

Although there is no blanket equation for royalty taxes, typically royalties received from your work are reported as self-employment income and are taxed at a higher rate. You report these on Schedule C of IRS form 1040. If you earn more than $400 through self-employment, including royalties, you must report that income on your tax return.

Royalties from one-time earnings (a gig that isn't your primary job), or mineral interests, are reported on Schedule E of IRS Form 1040. Let's look at a few real-life examples.

Say you write and publish a book outside of your regular job. You never revise it. In the eyes of the government, you're not self-employed as a writer, so your royalties wouldn't be reported as self-employment under Schedule C. Instead, report them under Schedule E, Supplemental Income. However, if you're a full-time writer, or you regularly revise your book, the government considers you self-employed as a writer and you would report your royalties under Schedule C, Profit or Loss from Business [source: Saenz].

Of course, it's not always so cut and dried. Often, artists receive advance royalties before a work is completed. For example, a record company might pay a songwriter advance royalties of $10,000 for the rights to 10 songs, plus a percentage of proceeds of the songs' sales. But if the songs end up not making any money, the songwriter still gets to keep the $10,000. So even though that money is called advance "royalties," the taxman actually sees that $10,000 as money for services rendered, reported on IRS Form 1099-Misc, Non-Employee Compensation [source: Kelley].

In the streaming era, musicians earn small royalties every time their song is streamed on services like Spotify and Pandora. Interestingly, streaming royalties are paid to both the performer and writer of a song, while royalties for songs played on the radio are only paid to the writer. The average per-stream payouts are a miniscule $0.006 to $0.0084; [source: Wang]. In an era of declining royalties, musicians have to get creative to earn a decent living, whether it's with live events, exclusive content to subscribers, advertising deals or selling merchandise.

If you need more guidance on royalties, a tax adviser can point you in the right direction.

Originally Published: Nov 10, 2014

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Royalty Income FAQ

What is royalty income?
Royalty income is money that's paid to you in exchange for the use of your property. That property is typically copyrighted material like music, art, or written works. Royalty payments are often paid per unit.
Are royalty payments tax deductible?
Royalty payments are typically not tax deductible. They are considered self-employment income, which is taxable. You're required to report these payments as income when you file your federal taxes.
Are royalties earned or unearned income?
Royalties are considered earned income.
Is royalty income considered investment income?
Royalties can be considered investment income. This means they can fall under the Net Investment Income Tax.
Are royalties a business income?
If you are self-employed or run your own business and receive royalty payments, then royalties can be considered business income. However, if your business pays out royalties to others, it is considered an expense rather than a type of income.

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Related Articles

  • Adkins, W.D. "Royalties Subject to Self-Employment Tax." Houston Chronicle. 2014. (Sept. 26, 2014) http://smallbusiness.chron.com/royalties-subject-selfemployment-tax-12596.html
  • Financial Web. "Reporting Royalties In Your Federal Income Tax Schedule." 2014. (Sept. 25, 2014) http://www.finweb.com/taxes/reporting-royalties-in-your-federal-income-tax-schedule.html#axzz3ETO7CD00
  • Investopedia. "Royalty." 2014. (Sept. 26, 2014) http://www.investopedia.com/terms/r/royalty.asp
  • Kelley, Claudia L., Ph.D., CPA, and Kowalczyk, Tamara, Ph.D., CPA. "Tax Issues for Individuals Who Create Intellectual Property." American Institute of CPAs. Dec. 1, 2014. (Sept. 25, 2014) https://www.thetaxadviser.com/issues/2013/dec/kelley-dec2013.html
  • Saenz, George. "Royalties deemed ordinary income." Bankrate. Oct. 11, 2007. (Sept. 26, 2014) https://www.bankrate.com/finance/taxes/reporting-royalty-income-for-textbook.aspx
  • Wang, Amy X. "How Musicians Make Money -- or Don't At All -- in 2018." Rolling Stone. Aug. 8, 2018 (Feb. 3, 2021) https://www.rollingstone.com/pro/features/how-musicians-make-money-or-dont-at-all-in-2018-706745/