What is Royalty Income and How is it Reported?

Royalty income is money you receive as payment for allowing someone to use your property or to derive income through the use of property you own. Royalty-generating property can take many different forms:

  • Real estate
  • Mineral rights
  • Photographs, videos, drawings or illustrations
  • Plays, books, songs, poems or articles
  • Other types of real or intellectual property

Royalties are frequently generated through license agreements, copyrights, patents and oil, gas, or mineral leases. If you receive royalty income you will probably get one or more Form 1099-Misc in January or February of the tax year following the year in which you received the payment. The amount of the royalty payment will be shown in Box 2 of the form. You are responsible for reporting all income on your tax return and paying the appropriate tax on it even if you do not receive Form 1099 from the payer. 

How do I know where to report my royalty income?

Before you can report royalty payments you must determine whether you should report the money as business revenue or investment income. Any royalties you receive will be treated as investment income unless your primary business involves this type of activity.

If your job or business is unrelated to the source of the royalty payment, it’s probably investment income that should be reported on Schedule E, Supplemental Income and Loss. For example, if you purchase or inherit mineral rights and sign a lease to a company that wants to drill or prospect for oil, gas or other mineral resources, the money you receive should be treated as investment income unless your primary business is investing in mineral rights.

Self-employed taxpayers should compare royalty payments to their regular work to determine how to report this income. If the royalty income is unrelated to the work you usually perform as a self-employed taxpayer, you should report the payments on Schedule E. For example, a freelance software developer who sells the rights to a song they wrote can report any related royalty payments as investment income.

On the other hand, a musician who sells the rights to a song must treat any royalty income related to that song as business income. If your business owns or creates the property that generates the royalty payment (e.g., graphics your business created, copyrighted content or software licensed by you or your company for someone else to use), then the royalty income must be reported on Schedule C, Profit or Loss From Business. Your gross business revenue will increase by this amount and you must pay self-employment taxes on this income.


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