Federal Tax on Royalties
The federal government imposes taxes on a wide variety of income sources besides the wages and salaries earned by workers. If you own intellectual property, such as copyrights or patents, or if you own property containing natural resources, such as oil, gas or minerals, you may receive royalty income. Royalty income is considered a form of normal taxable income by the Internal Revenue Service and must be reported on your income tax return.
Royalty Income Basics
A royalty is a payment you receive for allowing someone else to use assets you own to make money under the terms of a licensing agreement. For example, if you work as an independent musician and a business wants to sell your music, you could create a licensing agreement that lets the business sell your work in exchange for royalties. Royalty income is typically based on the amount of revenue a licensed asset generates. For instance, a musician might earn 10 cents in royalties for each dollar of sales associated with his music. Royalty income is included in taxable income along with regular wages and salaries, so the tax rate on royalties is your income tax rate.
If you receive more than $10 in royalty income, the payer of the royalties should send you Form 1099-MISC. Form 1099-MISC documents miscellaneous sources of income, including royalties, rents and other nonemployee compensation. Royalty income is listed in box 2 of Form 1099-MISC.
Reporting Royalty Income
Since royalties count as taxable income, you must report royalties on your federal income tax return. Royalty income is listed line 17 of Form 1040. According to the Internal Revenue Service, you must generally fill out and attach Schedule E to your 1040 to report royalty income. If you earn royalties as a self-employed individual or hold an operating oil, gas, or mineral interest, you report royalties as business income and expenses on Schedule C instead of Schedule E.
When you work as a self-employed writer, inventor or artist, royalties are a form of business income and are subject to self-employment taxes in addition to federal income taxes. Self-employment taxes fund Social Security and Medicare. In 2012, self-employed individuals pay 10.4 percent for Social Security on the first $110,100 of income earned and 2.9 percent for Medicare on all self-employment income.
- Internal Revenue Service: Publication 525 - Main Content
- Internal Revenue Service: Other Income
- Internal Revenue Service: 1099-MISC
- Internal Revenue Service: Form 1040
- Internal Revenue Service: Instructions for Form 1099-MISC - Main Contents
- Internal Revenue Service: Self-Employment Tax (Social Security and Medicare Taxes)
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.