Where Do Royalties Go on Tax Returns?

Royalties are a very common source for some individuals like self-employed, freelancers, and business man, but knowing how to report your taxes of royalties on your tax return can be a bit a complicated for citizens who are not updated with the never-ending changing laws. No matter where you earn your royalties from, whether from a property or any other assets, it’s really necessary to report your taxes through Schedule E or Schedule C and specially how the Form 1099-MISC plays a really important role in all this.

Understanding these tax implications is necessary to report your taxes your properly, without making any error in your forms and submission and it all should be according to the guidelines provided by the IRS. As your read this you’ll be guided, the importance of reporting your royalties, what is exactly your royalty income, and how it should be reported everything will be covered here.

What Is Royalty Income?

What exactly is Royalty Income? A royalty income is a payment you receive after allowing someone else to use your own asset for their personal use. These payments can come from different types of sources, such as music, books, mineral rights. The person, third-party or any company that’s using your assets to make their own profits will pay a decided percentage of the profit per unit sold.

A common example is, when an author writes a book, he may receive royalty income on each copy of the book that’s sold. Similarly, if you have a land, you will have mineral rights on that piece of land, and if oil or gas in extracted from that land you will receive a royalty income because you have mineral rights. These types of payments are tax payable and all these incomes will be reported to the IRS, because you have to pay taxes on the subtotal income.

How Are Royalties Reported on a Tax Return?

Form 1099-MISC

If from any source you receive a royalty income of at least $10, the company or the person paying you will issue you a Form 1099-MISC. All the amount earned through this process will be listed in the Box 2 in the form.

For some reasons, if the company didn’t give you the Form 1099-MISC, you still have to report your royalties to the IRS, as the IRS considers all the earned royalties amount taxable. So, its really important to keep accurate all these records of your earning to avoid any penalties.

Schedule E vs. Schedule C: Where to Report Royalty Income

The difference comes from whether the royalty payment came from a passive income like from an investment you made or the income that was earned came from a part of your business.

Reporting Royalties on Schedule E

In most cases, royalty income is usually reported on Schedule E (Supplemental Income and Loss). This form is used to report rental incomes, royalties, and real estates.

Let me explain with an example, for instance you are an author of a book, you wrote years ago, or you have mineral rights over a piece of land, the royalties earned from this will be considered passive, and it should be reported by utilizing Schedule E.

Reporting Royalties on Schedule C

Now comes the Schedule C, if you are actively earning such as a business earning, any royalties earned from that will be reported using Schedule C. This means all the incomes that are earned through this, whether it’s a self-employed work, or a freelancing work or any business all this is considered business income.

Again, an example will be helpful, if you are a self-employed musician, and you actively record your music and your music is promoted, any royalties earned through that will be reported using Schedule C.

How to Enter Royalty Income on Form 1040

Now you may ask, where did this Form 1040 came from as it was not discussed above, but don’t worry we will explain everything, once you have classified your earnings as Schedule E or Schedule C the totals from these schedules will carry over to Form 1040.

If the royalties are reported on Schedule E, they will be included on Schedule 1, Line 5, and then transferred to Form 1040, Line 8. If they are reported on Schedule C, the income will go directly to Form 1040, Line 3, where it will be taxed as business income.