Tax Treatment of Royalties

by Gregory Hamel ; Updated July 27, 2017

Workers who earn wages or salaries pay income taxes to the federal government by having an employer withhold a portion of their pay to cover their tax liability. The Internal Revenue Service imposes taxes on many other types of income that which may not be subject to income tax withholding. Taxpayers must account for miscellaneous sources of income, like royalty payments, on their income tax returns.

What are Royalties?

Royalties are payments received from someone that uses another's intellectual or physical property to generate income. For example, a novelist might allow a publisher to publish and sell his book and receive a royalty payment each month based on the number of books sold. The Internal Revenue Service cites the following as types of property that can generate royalty income: literary, musical or artistic works, patents on inventions and land containing oil, gas or minerals.

Taxation of Royalties

The IRS advises that income earned in the form of royalties is taxable as ordinary income on a taxpayer's income tax return. In other words, a taxpayer will have to pay income tax on royalties at the same rate that applies to his wages or salary. For example, if he works a normal job that gives him enough income to put him in the 25-percent tax bracket and he also makes $2,000 in royalties, his royalties will be subject to the 25-percent income tax rate.

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Reporting Royalties

According to the IRS, taxpayers can generally report royalty income on Part I of Schedule E on Form 1040. This section deals with supplemental income and loss. If, however, a taxpayer earns royalties from holding an operating oil, gas or mineral interest or work as a self-employed writer, inventor or artist, he must report royalty income on Schedule C or Schedule C-EZ.

Considerations

When someone pays at least $10 in royalties she is required to file form 1099-MISC. This form is similar to a W-2 or other 1099 forms in that it lists income earned during the year and can be used to account for income when filing an income tax return. Taxpayers should save any 1099-MISC forms received so that they can refer to them when filling out tax returns.

About the Author

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.

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