Where Do I Put Royalties On My Tax Return?

Taxes are a regular part of generating income. No matter how you earn money, there’s a tax for that. 

Taxes on ordinary income or capital gains are fairly straightforward. But taxes you might owe on royalties are a little more complex. This is because royalties encompass a broad list of payment types and income. In other words, where to report your royalties when tax time rolls around greatly depends on the type of royalties you earn. 

Royalties – A Definition 

Royalties are formally defined as “legally binding payment(s) made to an individual or company for the ongoing use of their assets.” Royalties are paid by a third party for use of a product or patent. These payments are typically a percentage of revenues generated by the property’s use.  

Royalties are generated in a variety of ways: 

• Book and performance royalties. These are paid based on a percentage of sales (books) or the number of times something is performed or played (performance).  
• Patent, copyright, or trademark royalties. Paid by third parties to a creator for the use of a product or patent. 
• Franchise royalties. Paid by a franchisee to a franchisor for the right to operate under a company’s name. 
• Mineral royalties. Sometimes known as mineral rights, these are paid by extractors to property owners from which minerals or oil is extracted. 

In most cases, royalties are taxable as ordinary income. In other words, how much you pay in taxes on royalties greatly depends on your specific income bracket.  

Where They’re Reported 

As is the case with many taxable items, where to report your royalties depends on how they’re generated. Royalties generated as a part of your business might be reported differently than those resulting from physical extraction. Royalties generated from patents or intellectual property will be reported differently than royalties resulting from mineral rights ownership. 

In most cases, you’ll report your royalties in Part I of Schedule E on your Form 1040 or Form 1040-SR, identified as Supplemental Income and Loss. 

But this differs if your royalties are the result of oil, gas, or mineral interests. The same holds true if you’re self-employed, and those royalties are the result of your works (like royalties from book or music sales or art posters). If this is the case, your royalties end up on your Schedule C. 

Adding to the confusion is that advance royalties, in which you might be paid before finishing a creative work, aren’t necessarily royalties at all. Specifically, advance royalties might be issued to cover your expenses while you generate a creative work for sale (versus receipt due to sale or performance). As such, this information would be reported on Form 1099-MISC as Nonemployee Compensation, as opposed to royalties. 

Sifting Through the Royalty Confusion 

The main takeaway from the above is that earned royalties must be reported to the IRS. But the “how” and “where” can become a little confusing. Any questions about reporting royalties should be directed to your tax professional. This will help ensure that the information ends up on the correct form.