What Is a Residual Payment?

What Is a Residual Payment?
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Have you ever wondered what a residual check means? If you are interested in making money even when you are not actively working, you might want to get familiar with residual income and the kind of activities and investments that can offer residual payments. Residual income can provide a diverse and fairly easy source of income.

What Is a Residual Payment?

A residual payment is better known as a royalty. These are payments associated with licensing agreements. They are considered to be passive income, which makes seeking royalties an ideal income stream for many individuals and small business owners, especially those who make money online. Further, they're offered when you fulfill predetermined requirements.

Many social media influencers, actors and artists seek out such licensing agreements as a part of their business model. For example, Forbes estimates that the cast of the hit show “Friends” profited by around ‌$260 million‌ dollars from syndication – in addition to their negotiated salaries for the series.

Of course, this is a rare example of unusually high residual payments. In actuality, many people believe that the profit margins are not worth the effort in pursuing residual income. Each payment can be rather small, especially starting out.

The recording industry has been famously accused of underpaying artists largely because they receive ‌16 cents‌ for every dollar paid out in royalties, according to Billboard. Songwriters, who also receive royalty payments, get ‌9.4 cents‌. Meanwhile, the record label takes ‌64 cents‌. Streaming has even further diminished payouts to artists, leading many to describe the system as a scam.

Therefore, it can take many years of experience to reach a point where royalty payments provide a stable income stream.

When Are Residual Payments Issued?

After an original work is created and copyrighted or patented, the royalty contract will be drawn up detailing the residual payments, any other related income and fees. Royalties are also paid for services or oil and mineral agreements, so details will vary based on the industry.

As sales roll in, the residual payments are triggered, resulting in periodic direct payments issued to the creator, artist or agent. At the end of the year, a 1099 tax document will be issued with the total amount of payments in ‌Box 2‌ of the 1099-MISC. Residual income is taxed as ordinary income and must be included on a tax return using Schedule E.

While residual payments may not pave a clear path to financial freedom, these payments require no additional effort beyond what was created upfront. This feature makes seeking royalties attractive, as payments can potentially accumulate and provide a bit of extra income, even if a work never reaches the same popularity as “Friends.”

Who Can Receive Residual Income?

Residual payments are common within the publishing and entertainment industries. You might be familiar with the common categories of royalties from publishing, songwriting, entertainment, franchising, real estate, patents and trademarks or minerals. However, the rise of e-commerce has also popularized royalties for online businesses, such as podcasts, social media and online sales on platforms like Shopify. Brokering credit card processing is one specific way to earn residual income online.

Songwriters can bring in a lifetime of residual payments even if the songwriter who wrote it never manages to create another successful song. Actors famously receive royalties for streaming services or syndication, while publishing a book or an online mini-course can also yield royalties long after creation. Inventors can license inventions for residual payments. Entrepreneurs in franchising, payment processing as well as real estate and insurance agents all benefit from residual payments as well.

Since residual payments are associated with intellectual property, that property can be inherited and passed on to descendants. This means that the children of inventors or artists may be able to benefit from receiving payments throughout their lives as well.