How Royalties Can Affect Your Taxes

Businessman Pointing To A Text That Says ROYALTIESHave you ever wondered if you’ll be able to live comfortably in 20–30 years? All you have to do is to learn about royalties. A royalty is a payment made to the owner for the use of his or her property. It’s not limited to music. It can also involve copyright, patents, and trademarks. It also covers other industries such as oil and gas.

Some people earn a few cents per use such as in music, but since it accumulates over time, it can still amount to hundreds to thousands of dollars. This also makes royalties a good source of income.

But since it’s income, does this mean you have to report it to the tax man? How will it affect your taxes?

Royalty taxes can be very confusing. As such, some professional help is always welcome. You can use a reliable tool that can guide you on how to calculate royalty payments. Keep in mind the IRS always demands honesty and accuracy.

Report It

When it comes to determining your taxable income, you report all earnings you make. That includes your royalties. Perhaps the biggest source of confusion is where. For instance, royalty interests earned from oil and gas would have to be on either Schedule C-EZ or Schedule C. Some royalty payments belong to Schedule E.

The state or the local government may also collect taxes from you. There’s severance tax levied on gas and oil. People who hold interests in these businesses will have to pay a pro-rated share.

How Much To Pay

Many factors can affect the overall tax amount you should pay. The payment may be subject to a self-employment tax depending on the activity. An example is a royalty paid to musicians.

You can, however, reduce your royalty tax by claiming deductions. Those who have oil or mineral rights, for instance, can declare a depletion allowance. If you sell your rights or interests, then you report not income but capital gains.