How to Report Royalties on Form 1099-MISC

When a business or individual makes royalty payments, they may be required to report this information to the Internal Revenue Service. This reporting is done using an information return that details the amount paid and to whom it was paid. The process involves determining if a form is necessary, gathering the correct information, completing the form, and submitting it correctly, while recipients must know how to report this income on their tax returns.

Determining the Filing Requirement for Payers

A business must issue a Form 1099-MISC, Miscellaneous Information, to any person or company it has paid at least $10 in royalties during a calendar year. This threshold is specific to royalties and is lower than the $600 threshold for other types of payments on the same form, such as rents or prizes. The IRS defines royalties broadly to include payments for the right to use intellectual property like patents, copyrights, and trademarks. It also covers payments for the extraction of natural resources, including oil, gas, and other minerals.

Payers must distinguish royalty payments from payments for services. Payments to an independent contractor for their labor are reported on Form 1099-NEC, Nonemployee Compensation. Royalties are payments for the use of property or rights, not for the performance of a service. For example, paying a writer a fee to create an article is nonemployee compensation, while paying that writer a percentage of sales for a book they have already written is a royalty.

Information and Form Completion for Payers

Before a payer can complete a Form 1099-MISC, they must obtain accurate information from the royalty recipient. The standard method is to request that the recipient complete and return a Form W-9, Request for Taxpayer Identification Number and Certification. This form provides the payer with the recipient’s legal name, address, and Taxpayer Identification Number (TIN). A TIN can be a Social Security Number (SSN) for an individual or an Employer Identification Number (EIN) for a business.

With the W-9 information, the payer can fill out Form 1099-MISC. The payer’s name, address, and TIN are entered in the “PAYER’S” section. The recipient’s information from the Form W-9 is entered in the “RECIPIENT’S” section. The gross amount of all royalty payments made during the year is reported in Box 2, “Royalties.”

Payers must use official, scannable copies of Form 1099-MISC when filing with the IRS. These cannot be downloaded from the IRS website but can be ordered from the IRS or purchased from office supply retailers. Using a non-scannable copy can result in processing delays and potential penalties.

Filing and Submission Process for Payers

Once the Form 1099-MISC is completed, the payer must adhere to specific deadlines for distribution and filing. Copy B of the form must be sent to the royalty recipient by January 31 of the year following the payment year.

The payer is also required to file Copy A of the form with the IRS, and the deadline depends on the filing method. If filing by paper, Copy A must be sent to the IRS by February 28. When paper filing, all 1099 forms must be sent with a summary document, Form 1096, Annual Summary and Transmittal of U.S. Information Returns.

For those who file electronically, the deadline is extended to March 31. Electronic filing is done through the IRS’s Filing Information Returns Electronically (FIRE) system or approved third-party software. The IRS requires electronic filing for payers submitting 10 or more information returns in a calendar year.

Tax Reporting for Royalty Recipients

An individual or business that receives a Form 1099-MISC showing income in Box 2 must report that amount as taxable income. The placement of this income on a tax return depends on the nature of the activity that generated the royalties, which determines the tax schedule used.

If royalties are derived from a trade or business in which the recipient is actively engaged, the income is reported on Schedule C (Form 1040), Profit or Loss from Business. This is the case for authors, inventors, or artists who create and license their work as their primary profession. On Schedule C, they can also deduct business expenses associated with generating that royalty income.

If the royalties are not from a trade or business, they are considered investment income. This income is reported on Schedule E (Form 1040), Supplemental Income and Loss. A common example is an individual who inherits mineral rights and receives royalty payments from an energy company. This income is generally not subject to self-employment tax.