There’s a lot of confusion, especially with new writers, about what a publishing royalty truly is, particularly when it is time to file their income tax return(s). The reason this is important to understand is because the term royalty – or royalties - means something different in the U.S. Tax Code, at least most of the time.
A royalty by definition is typically a usage-based payment that someone or a corporation receives for the use of a product or intellectual property. So, consider a person who invests in a venture such as oil wells and then as the oil is pumped out of the ground and sold that person receives royalties for their share of investing in the oil well from the start. In this example, the word royalty has the same meaning as the U.S. Tax Code and the money paid to the investor who received the royalties would be reflected on Form 1099-Misc, Box 2, which is aptly named Royalties.
In the writing world, even though publishers refer to the money sent to authors as royalties, the money is often categorized as Other Income, Box 3 on Form 1099-Misc because the author is not an investor as in the case of the oil well example above, but rather a material participant in producing a product for sale. When using tax software and when reporting the money “earned” to the IRS, where this money is listed on Form 1099-Misc has all kinds of income tax consequences.
Typically, Box 2 of Form 1099-Misc titled Royalties is reported on Form 1040 Schedule E and Box 3 of Form 1099-Misc titled Other Income is typically reported on Form 1040 Schedule C, at least for writers/authors who materially participate in their writing business and who are not considered a hobby.
Now there are writers/authors who do receive publishing royalties that are considered true royalties all the way through to their tax return and indeed reported on Schedule E. These writers could have written and published one or more books that long after they stop writing, the books continue to generate royalty income without the writer/ author having to lift a finger. But for most writers, especially those who continue to write, publish and promote their written product the income received is typically considered other income and reported on Form 1040 Schedule C.
For more information about the definition of royalty go to:
For more information about IRS Form 1099-Misc and how this form is used for tax year 2013 go to:
In the end, if you are receiving income for your writing and don’t understand how to report it on your federal and/or state income tax return, you should consider consulting a tax professional to help you sort through the reporting process. It is tax time after all.