Royalties Income: What Are Royalties On A 1099 Form?
By Jaden Miller , March 15 2021
Imagine sitting on a beach doing nothing but still bringing in money. Royalties income can make that possible for a lot of people. However, that doesn't keep you from having to pay royalties income tax. So what are royalties on a 1099? And what do royalties mean on a 1099-MISC? Read on to learn more about royalties.
How Do Royalties Work?
Royalties allow people to buy the rights to something. If you create or own something, you can license it for use by another person or business. When that happens, you will usually have a license agreement that includes information on your royalties. You may be wondering, what do royalties mean on a 1099-MISC?
Even though you don't always actively work, you have to report royalties income like any other form of business income. Whoever pays you for a license will report the payments as a business expense. You will still own the patent, copyright, or natural resources. The royalty payments are how you grant permission for others to use your creations or property.
It may seem weird to have royalties for your property, but it's not unheard of if you have oil or gas deposits. An oil and gas company can ask for a license to mine for those resources on your property. In return, they will pay royalties on the resources that they find. The company may pay royalties based on their revenue, or they could base the royalty on the number of resources they find.
Be sure to review your license agreement. Then, you can make sure the company pays you the correct amount. So what are royalties on a 1099, then? The 1099 is how the company will report how much they pay you. It works like any other non-employee job, such as freelancing. The difference is that you don't have to work or complete projects for that money.
Another popular category for royalties income is intellectual property. If you invent something, write a story, or compose a song, that creation belongs to you but you can license it to a publisher or to other companies wanting to manufacture your invention. So if a radio station wants to play your song, they can pay to license your music.
If a publisher wants to include your story in a book, they can pay for the right to do so. Then, you will earn royalties when someone buys that book or listens to your song. What does "royalties" mean on a 1099-MISC for intellectual property? It works similarly to royalties for resources since it shows how much you make from a license agreement in a year.
Who Qualifies For A 1099 For Royalties Income?
If you've never made much in royalties, you may wonder, what are royalties on a 1099? Even if this isn't your first year making royalties, it could be your first year receiving a 1099. That's because you don't need a 1099 if you didn't make more than $10 a year in royalties. So if you only started with a company at the end of December, you may not have had enough time to make that much money.
Still, it's much easier to hit that threshold with royalties than with other sources of income, like contract work. This means you earned enough in royalties for the company to report that payment, regardless of if your royalties come from one property or a dozen songs.
What Are Royalties On A 1099?
If you get a 1099 from an oil company or a publisher, it will show how much you made from that company in royalties. Now, that doesn't mean you didn't make royalties from somewhere else. Perhaps you're a writer and have made royalties there. However, if you buy a property that has oil or gas, and you license that to a company, you should get separate 1099 for each.
Whether you get one 1099 or more, you can find your royalties income in box 2. Then, you can use that amount when reporting your taxes. Maybe you are still asking, what does royalties mean on a 1099-MISC? It means any form of non-employee income that comes from some license agreement.
What Do Royalty Amounts Include?
If you've kept track of your income and earnings, you may notice a discrepancy with your 1099. So you may wonder, what are royalties on a 1099, and why are they different from your records? The royalty amounts on your 1099 cover everything you earn before any fees or commissions. If you have a literary agent who takes 10 percent, you may notice that you actually made 10 percent less.
You can talk to your agent or the company to verify that the 1099 is correct. That way, you can adjust your records and account for fees. Then, you can talk to an accountant about writing off those fees and home office expenses from your income taxes.
How To Pay Royalties Income Tax
Royalties income tax is no different from other taxable income. You will need to pay a royalties income tax at the end of the year based on your earnings. Luckily, you can file everything together with any other income you earned. If you work with an accountant, you can bring all of your records to them. If you file taxes yourself, an organization approach is one of the best and smart ways to budget for taxes as a freelancer. In some cases, you should use a Schedule C with your taxes, while other people should use a Schedule E.
Who Should Use A Schedule C?
Anyone who has a business or is self-employed should use a Schedule C to report their royalties income and royalties income tax. A Schedule C records your business profit and expenses, including royalties.
Who Should Use A Schedule E?
If you don't have a business and just get royalties on a property, you can use Schedule E. It covers income and losses from royalties, rental property, trusts, and estates.
Organizing Royalties Income
Some people will never have royalties income. If you create something to entertain the public or own property with natural resources, you may wonder, what does royalties mean on a 1099-MISC? The form will help you determine how much you need to pay in royalties income tax. You can then add it to the rest of your tax forms to file for all of your income streams.
Are you self-employed? Do you need to prepare tax forms for your employees? Find out more about form W2 before beginning the process of creating one.