Royalties represent payments to another party for the use of their property (typically intellectual or artistic property) or it provides the owner of real property a portion or percentage of the income derived from it (such as the production of minerals from their property). Royalties are reported to the owner of the property (either intellectual, artistic, or real) in Box 2 of Form 1099-Misc. The amount reported on the 1099-MISC represents the taxpayer's income associated with the underlying activity.
Where the royalties are reported on the tax return depends on the underlying nature of the royalty and the relationship that the taxpayer has with the activity:
- If the source of the royalty is derived in the ordinary course of the operation of a taxpayer's active trade or business activity, then the royalty income is reported as part of the gross revenue on a Schedule C.
- If the royalty income is from an investment, the royalty is reported on a Schedule E.
For example, a performing artist, photographer, or author may receive royalties as part of their regular business and such royalties would be part of their gross receipts on a Schedule C. Any resulting income would then be considered earned income, subject to self-employment tax and Qualified Business Income Deduction.
The same result may occur for a taxpayer that receives an oil and gas royalty if that taxpayer was in the business of producing and drilling oil and gas.
Another taxpayer may report the royalty income on a Schedule E if they are not actively engaged in the business that generated the royalty. In this situation the royalty is an investment and not considered earned income.
To Enter royalty income in TaxSlayer Pro, from the Main Menu of the tax return (Form 1040) select:
- Form 1099-MISC / 1099-NEC - Select New, then 1099-MISC, and if queried who the 1099-MISC belongs to, whether taxpayer or spouse.
- Enter the payer information, including their EIN, name, and address.
- Enter the amount in Box 2 for Royalties. If the royalties are to be reported on Schedule C, check the Sch C check box above the amount entered. After exiting this menu, you will be prompted to confirm linking the royalties to a Schedule C. Otherwise, you will be prompted to link the royalties to Schedule E.
Note: This is a guide to entering royalty income into the TaxSlayer Pro program. This is not intended as tax advice.