How Are Music Royalties Taxed? A Breakdown of Income and Deductions

Musicians, songwriters, and producers who earn royalties must understand how these payments are taxed to avoid surprises. Since royalty income comes from sources like streaming, album sales, and licensing deals, each type has different tax implications.

Tax treatment depends on how royalties are earned and reported. Proper classification, deductions, and record-keeping can significantly impact tax liability.

Classification of Income

Royalty income is taxed differently based on how it is earned. Understanding whether royalties fall under self-employment income, passive income, or a partnership ensures accurate tax reporting.

Self-Employment Income

Musicians, composers, and authors who actively create and market their work have their royalties classified as self-employment income. This makes them subject to self-employment tax, covering Social Security and Medicare. As of 2024, the rate is 15.3% on net earnings up to $168,600, with a reduced Medicare tax beyond that.

Without an employer withholding taxes, self-employed individuals must make estimated quarterly tax payments—due April 15, June 15, September 15, and January 15—to avoid penalties.

Artists operating through an LLC or S corporation may have different tax obligations. A sole proprietorship LLC is still subject to self-employment tax, while an S corporation allows some income to be taken as distributions, which are not subject to self-employment tax.

Passive Royalties

Royalties from intellectual property that an individual did not actively create or manage—such as earnings from a purchased song catalog—are classified as passive income. These are reported on Schedule E (Form 1040).

Passive royalties are taxed as ordinary income, with rates from 10% to 37% in 2024. They may also be subject to the 3.8% Net Investment Income Tax (NIIT) if modified adjusted gross income exceeds $200,000 ($250,000 for married couples filing jointly).

While passive income avoids self-employment tax, expense deductions are limited. Passive losses, such as costs associated with acquiring royalty rights, can generally only offset passive income, not other earnings.

Partnerships

Royalties earned through a business partnership—such as a joint venture between songwriters or a company managing music rights—follow partnership tax rules. Partnerships do not pay income tax directly but file Form 1065 to report earnings. Individual partners receive a Schedule K-1 detailing their share of income, deductions, and credits.

A partner’s tax treatment depends on their involvement. If they actively manage the partnership, their share of royalties may be subject to self-employment tax. Passive investors report earnings as passive income.

Partnership agreements dictate income distribution, affecting tax liability. Some states impose franchise or partnership taxes, adding to the overall tax burden. Reviewing the partnership’s operating agreement clarifies how expenses, losses, and deductions are allocated.

Filing and Reporting

Tracking and reporting royalty income correctly ensures compliance with tax laws. Since royalties come from multiple sources, proper documentation is essential.

Musicians and rights holders typically receive Form 1099-MISC or Form 1099-NEC from entities paying them royalties. Form 1099-MISC is issued when royalties exceed $10, while Form 1099-NEC applies if the recipient provided services as an independent contractor. Errors on these forms can lead to audits.

Royalties reported on Form 1099-MISC are entered on the tax return based on their classification. Passive royalties go on Schedule E, while self-employment income is reported on Schedule C. Foreign royalty payments may require additional forms, such as Form 8938 for foreign financial assets or Form 1042-S if withholding taxes were deducted at the source.

Estimated tax payments are necessary for those without tax withheld from their royalty income. Individuals expecting to owe at least $1,000 in taxes must make quarterly payments using Form 1040-ES to avoid penalties.

Deductible Expenses

Deductions reduce taxable income. Expenses must be both ordinary (common in the industry) and necessary (helpful for generating income) to qualify.

Studio rental fees, equipment purchases, and instrument maintenance are common deductions. High-cost items like recording consoles and synthesizers can be depreciated over multiple years. Section 179 of the tax code allows immediate expensing of certain equipment up to $1.22 million in 2024.

Marketing and promotion costs—including website hosting, social media ads, music video production, and public relations—are deductible. Touring musicians can write off travel expenses such as airfare, lodging, and per diem costs if directly tied to income-generating activities. Business meals are generally 50% deductible, requiring receipts and documentation of the business purpose.

Legal and professional fees for contract negotiations, copyright registration, and royalty collection services are also deductible. Fees paid to accountants, entertainment lawyers, and business managers qualify. Subscription costs for industry publications, professional associations, and music distribution platforms like DistroKid or TuneCore can also be deducted.

International Royalties

Earning royalties from international markets adds tax complexities, as foreign governments may withhold a percentage of payments. Withholding rates vary by country, sometimes exceeding 30%.

Tax treaties can reduce or eliminate withholding taxes, but claiming these benefits requires submitting forms like IRS Form W-8BEN for individuals or Form W-8BEN-E for entities.

U.S. taxpayers may be eligible for a Foreign Tax Credit (FTC) or deduction for foreign taxes paid. The FTC, claimed on Form 1116, offsets U.S. tax liability to prevent double taxation. However, it is limited based on the proportion of foreign-sourced income to total taxable income. Unused credits can be carried forward for up to ten years or back one year. Alternatively, taxpayers can deduct foreign taxes as an itemized deduction, though this is usually less beneficial than the credit.

Record Maintenance

Accurate record-keeping is essential for reporting royalty income and claiming deductions. The IRS requires documentation to substantiate earnings, expenses, and tax payments in case of an audit.

Using accounting software like QuickBooks or Wave helps track payments, categorize expenses, and generate financial reports. Maintaining separate bank accounts for business transactions simplifies reconciliation and prevents mixing personal and professional finances.

Royalty statements from performing rights organizations (PROs) such as ASCAP, BMI, or SESAC should be retained, as they detail earnings from public performances, streaming, and mechanical licenses. Contracts and licensing agreements should also be stored to verify income sources and royalty terms.

The IRS generally requires records to be kept for at least three years from the date a return is filed, but in cases of substantial underreporting, the statute of limitations extends to six years. Keeping documentation beyond these periods is advisable, especially for long-term royalty agreements that may be subject to future audits.