What Is the Difference Between Royalties & Income for Taxes?

by Jay P. Whickson ; Updated July 27, 2017

If you receive royalties in addition to normal income, you pay Social Security tax on your normal income. However, you don't pay it on royalties. They go on a schedule with rental income, IRS 1040 Schedule E, which is not earned income in the eyes of the IRS. If you receive a 1099 form showing royalties, it doesn't automatically mean it goes on Schedule E. The IRS has specific rules as to where you list the income.

Who Gets Royalties?

Royalties are payment for the use of your property. It might be mineral rights, or rights for oil or gas. However, the use of intellectual property also pays royalties. The tax treatment varies, as does the payment of Social Security tax.

Income vs. Royalties or Rent

People who post articles for page views receive royalties. This type of royalty goes on IRS 1040 Schedule C, and is subject to Social Security tax. Any writers, actors or self-employed inventors must report the royalties for their intellectual property as a small business. However, if you inherited the rights to a book or song, you list that income on tax Schedule E as a royalty, and pay no Social Security tax on the amount.

No Longer Active in the Business

If a writer no longer writes but continues to receive royalties, the royalties are still Schedule C income until he dies. When the rights pass to an heir, then it becomes a royalty reported on Schedule E. In most cases, it's easy to differentiate royalties from gas or oil, particularly if the royalty comes as a bonus for owning a specific piece of property. You weren't in business to find oil; it simply was there. However, intellectual property royalties often occur because you were in that particular business, which makes them taxable as income.

Expenses

You can deduct certain expenses from royalties, just as you can from Schedule C income. People that receive royalties can deduct the amount they paid in expenses for the royalties. For instance, if you receive an oil royalty, you could deduct the cost of property tax on the land. Those who report royalties on Schedule C also can take deductions. Even though the person has to pay self-employment Social Security tax, she can count the royalties as earned income, which you can use if you want to invest in an IRA. Earned income also counts toward earned income credit. A self-employed person filing Schedule C also can deduct half his self-employed health insurance. People filing Schedule E have neither option.