Royalties and Taxes

A dear friend of one of our employees just signed a contract with a literary agent. One of her first questions was, “So, assuming I get published, how do I handle taxes on royalties?”

That’s an interesting question, and one that depends greatly on the actual scenario. Royalties come from a variety of sources: another person’s use of art, writing, or music which you created; your investment in an operation such as mineral rights; your patent on an invention; your trademark on a certain word, phrase, or image. Further, royalties can be negotiated in different ways. Work can be sold to an investor (think a book being sold to a publisher), where the artist receives a constant percentage of income on each sale the investor makes. Or work can be licensed, where anyone can use the work once they pay a certain fee (think the paid images from digital media sites).

It does get more complicated in the publishing and music production industries. Here, creators are given an “advance,” which is basically a payment for royalties based on what a publisher predicts they will earn from the sale of the book. The artists do not receive any additional royalties unless they “earn out” that advance—meaning they have sold enough copies of their work to meet the publisher’s expectations, and are now making more than predicted.

No matter which way it’s negotiated or the reason for the source of the royalties, royalties are income and need to be reported to the IRS. There’s no “one size fits all” answer to the issue of tax calculation, but there are a few things to factor in. The considerations include whether the work is considered a full-time business or a side gig, when and how you received the income, and whether the property is owned by a company or by an individual.

Let’s say the royalties are a one-time earning—a side music gig, a side writing job (as in our friend’s case), a payment on a diamond mine (wouldn’t that be lovely). In these scenarios, the income is reported on Schedule E of your federal Form 1040.

But if the royalties come from a full-time job, for example Ken Follett or Yo-Yo Ma. These artists are considered self-employed, and must declare all their earnings, including royalties, on Schedule C of their Form 1040. This tax rate is higher than required for the side hustle reporting, and income from all sources must be reported when you hit $400.00.

The truth of the matter is, the majority of creators are not Stephen King or Yo-Yo Ma. Yet taxes are due no matter what. The best recommendation: Find a tax professional to help out in these matters.

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