Royalty checks are a reward for creativity. If you write a book, you earn royalties when someone buys a copy. If you compose a song, you make money when someone buys your CD or performs it professionally. You can also collect royalties if you lease out mineral rights to your land, based on the gas or oil produced. Royalty checks may come quarterly, twice a year or annually, depending on your contract.
The royalty rate for art varies with the type of creator. Publishers typically offer authors 7.5 percent for paperback sales and 10 percent for hardbacks, but top-name authors can command considerably more. Art designs on greeting cards run 2 to 5 percent; on clothes, 2 to 10 percent. The royalty rate for music companies to record a song to a CD is 9.1 cents per copy or 1.75 cents per minute for songs longer than five minutes. Publishers usually subtract various items -- stores returning unsold book copies, for instance -- from the royalty payments.
When a mineral company thinks your land is a great investment, it may offer to buy it outright. If it's unsure how much oil your land holds, leasing is safer financially: The company agent pays you to sign a contract giving the company the right to any oil it finds in the next year or two. Leasing is cheaper than buying, but if oil is there, you make it up in royalty payments once drilling starts. The standard royalty is 12.5 percent or one-eighth of the value of the oil or gas.
Inventors also earn royalties. If you patent a new kitchen device, you can license the concept to a manufacturer and collect royalties on sales. Royalties for inventions run from 3 to 10 percent, while new drugs may generate as much as 20 percent. The manufacturer applies the percentage to the increase in sales due to your patent: If you have a 10 percent royalty and the patent doubles the company's sales, you're entitled to 10 percent of the added sales income.
Royalties are taxable income, just like salary and sales commissions. If you're self-employed as an inventor or a writer, you report your royalties on Schedule C, for business income. You also use Schedule C for income from mineral leases. If your royalties fit into some other category, you assign them to Schedule E, for supplemental income and loss. The tax rate on royalties is the same you pay on the rest of your income, unless the royalties are high enough to push you into a higher bracket.
- BMI: General Royalty Information
- Geology.com: Mineral Rights
- Writers Services: Advances and Royalties
- Nolo: Licensing Artwork: Negotiating and Monitoring Royalty Payments
- Harry Fox Agency: Mechanical Royalty Calculator
- Fish & Associates: Valuing Patents -- Royalty Rates
- Internal Revenue Service: Taxable and Nontaxable Income
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.