What You Should Know About Reporting Royaltiesby
Our long-time tax contributor Julian Block regularly receives commentary about his posts, as well as a multitude of emails from other practitioners.
Here is a Q&A around the issue of how and what forms to report specific royalties. We hope you find it informative and, as ever, feel free to add your own comments and questions to this as well.
Q: I’m a self-employed writer and have authored fiction and nonfiction books. At present, I’m represented by two agents—-one for nonfiction and another for fiction. Under my agents’ contracts, each gets a percentage of my earnings.
When filing time rolls around, both agents provide1099 forms that show what they’ve sent me during the year in terms of advances, royalties received from publishers, and other payments related to my books. But they do different kinds of bookkeeping!
One agent’s 1099 lists the gross (full) amount she received from the publisher as my income; that is, she doesn’t allow for the commission subtracted by her up front before sending a check for the balance to me. The other one handles things differently; his 1099 lists only the net (after commission) payment he actually sent to me. How should I report these payments on my return?
A. Let consistency be your guide. The amount of income you declare should be consistent with the figures shown on your 1099 forms. Otherwise, the IRS’s ever-vigilant computers might go bananas, with unpleasant consequences to you.
When it comes to monies you received via an agent, what you should declare depends on whether the agent submits a 1099 form for you that shows the gross amount (total paid by the publisher) or the net amount (amount actually paid to you after the agent’s commission is deducted).
Does the 1099 filed by the agent list the gross amount? Then that’s the figure you should include in totaling your income to come up with your gross amount on Schedule C—and remember to include the agent’s commission in the total figure shown for commissions and fees.
And if you fail to do that? First, you overstate your net profit. Second, you overpay your self-employment taxes and income taxes—federal, and, perhaps, state and city. You shouldn’t count on the IRS to catch your mistake. These kinds of miscues are spotted, if at all, in the course of audits.
Does the 1099 from your agent instead list the net amount, the sum on the check actually sent to you after the agent’s commission taken off the top? Then you should use that amount in arriving at your gross income figure— and you should not deduct the commission on the line for commissions and fees, since it’s already been subtracted from the income figure.
To make that perfectly clear, here’s an example: Say your agent receives a check from your publisher in the amount of $50,000, deducts the 15-percent commission of $7,500, and sends you a check for $42,500.
After that year’s end, you receive a 1099 form that shows $50,000. You should include the full $50,000 in your reported gross income and deduct the $7,500 commission on the line for commissions and fees.
If, on the other hand, the 1099 shows only the amount actually sent to you, $42,500, you should include only $42,500 in gross income and deduct nothing. Either way, you pay tax only on the $42,500. Either way, the serenity of the IRS’s computers will be preserved.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 250 and counting).