royalty income business plan

Royalty Income: Everything You Need to Know

Royalty income is a type of payment for an intangible work or other intellectual property that is patented, trademarked, or copyrighted. 3 min read updated on February 01, 2023

Updated November 5, 2020:

Royalty income is a type of payment for an intangible work or other intellectual property that is patented, trademarked, or copyrighted. These payments occur when another person is profiting from something you've created with your permission. You'll also receive royalty income if you invest in a mineral operation such as gas or oil. Simply put, you can profit from other person using your property by charging royalties. In most cases, royalty agreements are legally binding. 

Types of Royalties

Common types of royalties include:

• Performance royalties for the use of copyrighted music
• Royalties for the use of online images and artworks, such as stock photography
• Book royalties that publishers pay to a book's author
• Patent royalties paid to the owner of a patented invention by a third party who makes and sells the invention
• Franchise royalties paid to the owner of a business' name and assets
• Mineral rights paid when natural resources are extracted from a person's land by a utility company
• Royalties paid to celebrities who use their name to promote a fashion line

Terms of Royalty Agreements

While royalty contracts can vary in terms, most require payment of a percentage of the revenue earned while using the property in question. The license agreement must specify the length of the agreement, the product that is given in exchange for the royalty payment, the amount of the royalty payment, and any geographic limitations for use of the product. Note whether the property is being licensed for one-time or perpetual use. 

This agreement should also indicate when payments will be made, how records should be kept, and whether an advance payment (sometimes called an earn-out) is required. A common example is with an author contract; he or she receives an advance from the publisher and after royalty amounts exceed that advance, the author will begin receiving royalty payments.

The description of the property in question must be given in detail, and the name of the existing owner provided. For example, if you are licensing a group of stock images, the contract would describe each of them in detail and note that they would heretofore be referred to as "the Images."

Royalty rates vary depending on a number of factors including exclusivity, market demand, and the existence of available alternatives to the product in question. The rate is often a fixed or variable percentage of gross sales and may be subject to a minimum royalty amount. With a royalty agreement, you are selling the property itself and receiving payments depending on the revenue it generates. You can also make an arrangement, called licensing, in which you retain ownership of the property but charge another entity money to use it. 

Tax Implications of Royalty Payments

Royalties are both taxable as income and deductible as a business expense. These payments must be reported to the IRS and are usually recorded on Schedule E: Supplemental Income and Loss. However, this depends on whether you own a business, the type of property in question, and who retains ownership of the property.

If you own a business as a sole proprietor or single-member LLC, the income must be reported on Schedule C . Corporations must show royalty income on their balance sheets. An advance on future royalty income is also taxable in the year it is received.

Royalties you pay another entity for the use of intellectual property can be deducted as a business expense. If you are purchasing the property itself and not just the license, it is considered an asset and must be amortized over time. 

If you sell your royalty interest, it will likely be considered a capital gain and thus subject to capital gains tax. 

Royalty Income Trusts

Royalty income trusts are a type of legal entity known as an investment trust. This financial vehicle is used to hold investments and/or associated cash flows in an operating company. These trusts purchase royalty rights from a natural resource company and pass the profits on to owners of units in the trust. This investment provides a higher yield than bonds and stocks do and are thus attractive to companies that want to sell assets that produce cash flow.

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A guide to royalty payments: from calculation methods to tax implications

RoyaltyRange

For any company looking to enter into a license agreement, understanding the fundamentals of royalty payments is essential: how they work, how they’re calculated, and how they’re treated from a tax perspective.

Royalty payments allow intellectual property (IP) owners to monetise their creations and receive compensation for their use by others. They also enable licensees to invest in new assets in a cost-effective way.

Below we take a closer look at how royalty payments work, along with financial regulations, tax considerations, and how these vary in some key global territories.

For help determining royalty payments, check out our royalty rates database , relied on by multinational enterprises, global consulting companies, international law firms and tax authorities around the globe, and our royalty rate benchmarking tool here .

Royalty payments: the fundamentals

What are royalty payments?  

Royalty payments are legally binding payments made by a third party to an individual or company for the ongoing use of their assets, which are usually in the form of ‘intangibles’, i.e. “something which is not a physical asset or a financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances”.

What different types of royalty payments are there?

The payment of royalties provides a vital function in creating a fair and equitable way for innovators or owners of IP to receive due compensation for their work. Royalties also play a pivotal role for businesses, giving them legal rights to IP without impinging on an owner’s exclusive rights.

Royalty payments can apply under the terms of licensing agreements for:

• Art – including books, music, performing and visual arts
• Photography, video, and digital content
• Patents, trademarks, copyright, and know-how
• Business franchises
• Oil and gas mining royalties

What are common royalty payment structures?

Royalties are typically agreed as part of licensing agreements between a licensor and the licensee. Depending on the type of asset or other factors, various payment structures may be used.

Most structures involve determining payments based on a percentage of the revenue or profits earned from using the IP. For patents, in particular, royalty payment structures are often based on a fixed percentage of sales or a flat fee per unit sold. Franchises often involve a significant initial royalty fee, in addition to percentage royalties, to account for the brand equity already established in the franchise. For newer IPs, the initial royalty percentage may start small and increase as sales take off.

How are royalty payments calculated?

Of course, it’s essential that all parties agree on fair royalty rates. Rates may be negotiated based on a number of factors, such as exclusivity, market demand, brand recognition, geographical region, and competitor analysis. It is also important for parties to consider industry benchmarks, market research, and the potential value the IP will bring to the licensee.

To determine accurate royalty rates, parties typically rely on access to high-quality comparative data. Commercial databases are a practical and cost-effective way of identifying external comparables. They can provide the most reliable source of information, giving parties confidence that their royalty agreement features optimum royalty rates for all concerned.

Learn more about how to calculate royalty payments with our benchmarking tool here .

Royalty payments and tax considerations

Below you can see how royalty payments are accounted for in different countries from a tax perspective.

Royalties are part of business income, counting towards annual tax. Individuals receiving royalties must declare earnings on their self-assessment but can make use of the trading allowance of £1000 to reduce the tax burden.

In 2017, a government consultation regarding the impact of the digital economy resulted in tweaks to royalty taxation. Under the current system, companies making royalty payments in specific areas will need to deduct withholding tax at 20% from those royalties.

Under the EU Interest and Royalties Directive (IRD), EU companies are allowed to make certain interest and royalty payments to associated companies within the EU without deducting tax. Since Brexit, this no longer applies to the UK.

Businesses can generally take a tax deduction for royalty payments as expenses. The IRS treats royalty income as ordinary income reportable either on Schedule E for Supplemental Income & Loss or Schedule C for self-employed people. Paying royalties or licensing fees might fall under business expenses, and payments over $10 a year must be reported on a 1099-MISC form to show total payments.

International

International transactions involving royalty payments may require compliance with transfer pricing regulations, which aim to ensure that royalty payments are conducted at arm’s length. These regulations prevent tax evasion and ensure that intercompany transactions are conducted at fair market value. You can read more about arm’s length transactions in our blog post here .

Royalty payments: Looking to the future

As the world becomes increasingly digitised and intangibles such as digital content and software transform the landscapes of technology and creative industries, royalties will continue to play a crucial role for creators and businesses alike. New forms of IP are emerging in the global economy, making the calculation, tracking and enforcement of royalties ever more challenging.

“Although advancements are continually occurring, it is reliable, accessible comparative data that remains the key to royalty agreements that provide mutually beneficial payment terms, as well as encourage collaboration and innovation,” says Kris Rudzika, Managing Partner at RoyaltyRange.

When it comes to finding the highest quality data for setting fair and accurate royalty rates, the RoyaltyRange database is the go-to tool for multinational enterprises, global consulting companies, international law firms and tax authorities in more than 70 countries around the world.

Ready to get started? Use the search box on the right to begin your royalty rates search.

Or, if you’d like to find out more, read about how our royalty rates search service works .

The information provided below is for general informational purposes only and should not be construed as legal or tax advice.  It is not a substitute for consulting with a qualified legal or tax professional.

Request royalty rate search

We will perform the search and deliver the initial results within hours, at no cost., finalize your request, within hours, you will receive a detailed list of reports from our search at no cost. if you are happy with the results of our search, you can then choose to pay for and download the data for a fee of . the fee for an optional write-up is ., your contact information.

How to Buy Royalties: A Guide to Royalty Investing

In the words of author H. W. Charles, the key is to work extremely hard for a short period, create abundant wealth, and then make more money through wise investments that generate passive income for life.

There are a few ways you can go about generating passive income — and one of the most interesting is to buy royalties.

What Are Royalties?

Royalties are a popular type of alternative investment. When you invest in a royalty, you receive compensation for the ongoing use or ownership of a physical or intellectual asset — like a song or a product.

During a royalty negotiation , both parties agree to terms and lay them out in an official licensing agreement. The royalty rate that you receive is typically expressed either as a payment per unit or as a percentage of sales for a specific period — up to and including “in perpetuity.”

Property owners often decide to sell royalties because they need funding. For example, a songwriter, band, or record label may sell royalties to their music to fund a new personal or business-related project.

In another example, someone might sell a piece of intellectual property to turn an idea like a new invention into liquid capital. The person may have a great idea but lack the means to turn it into a viable product.

As a seasoned investor, you’d be wise to keep your eye out for royalty opportunities. If you come across a surefire money-maker, it could be worth providing funding, becoming a rightsholder, and potentially receiving royalty income payouts.

But as you can imagine, royalty investing isn’t for the faint of heart.

Learn More:

• Best Passive Income Ideas

Types of Royalties

There are several types of royalties that you can invest in, including copyrighted works, natural resources, and businesses.

Copyright Royalties

Copyright royalties can include items like books, works of art, and music.

For example, you might invest in a new or classic song from Eminem or Rihanna or a book from a leading author like John Grisham. Another option would be to buy the rights to a classic film like Trading Places starring Eddie Murphy — one of my faves!

Performance Royalties

Performance royalties are fees that users pay for the right to play someone else’s music in a public environment.

For example, bars and restaurants, streaming services like Spotify, and radio stations all commonly pay performance royalties to trending artists.

Mechanical Royalties

A mechanical royalty is a fee specifically for reproducing a musical composition. Mechanical royalties can apply to physical, digital, download-to-own, and streaming services.

Print Music Royalties

Musicians often sell their music in printed sheets to publishers for reproduction. In exchange, publishers pay print music royalties for the right to sell their material in physical or digital form.

Synch Royalties

Content producers pay synch royalties when using copyrighted music in audiovisual productions like movies, advertisements, and television shows.

Mineral Royalties

Extractors often pay property owners for the right to take natural resources from their property.

For example, a property owner sitting on a lucrative piece of land might want to make money selling oil and gas royalty licenses to buyers for an agreed-upon period of time. In this case, an extractor would pay the owner for mineral royalty rights.

By securing mineral rights, you can legally remove, process, and profit from someone else’s raw materials.

Patent Royalties

Inventors commonly make their money by patenting products and then creating licensing agreements that allow other people to use their models.

As an investor, you can buy patent royalties and invest in intellectual property.

Franchise Royalties

Business owners often pay companies a fee for the right to open a franchise under their name. This type of royalty is common in the fast-food industry — like McDonald’s and Chick-fil-A.

How to Buy Royalties

Investing in royalties may seem complicated at first. But truth be told, it actually has a surprisingly low barrier to entry.

Use the following steps to start investing in royalties and increasing your earnings.

Step 1: Make Sure You are Ready to Take on Risk

All investments carry some amount of risk, and royalties are far from an exception. So before you do anything, make sure you can afford to take on risk in your portfolio.

For example, music, art, and entertainment all carry valuation risk. In other words, you may overpay for someone else’s property. There’s also the threat of counterparty risk. That being the case, you must do your due diligence and ensure that the person selling an asset owns what they’re hawking.

Additional factors to consider include inflation, changing regulatory policies, and technological innovation — all of which can impact the value of an asset. There are simply no guarantees that your royalty interests will pan out.

This is especially important to consider when buying property like a patent or business. Just because something looks good on paper — or maybe you have even connected with it emotionally — doesn’t mean it will pan out and turn into a viable or secure source of revenue.

Step 2: Pick a Type of Royalty

Ready to move forward? The next step is to figure out what type of royalty you want to invest in.

My advice is to keep it simple. As with any investment, focus your resources and energy on something you understand.

For example, if you are looking for passive long-term growth and you have above-average knowledge of fine art, then investing in art and entertainment royalties could be the way to go.

If you’re a foodie and have some restaurant experience, you may want to franchise a fast-food business. If you’re a tech guru or inventor, you could invest in someone’s intellectual property.

Whatever you decide, figure out a direction that you’re comfortable with and excited about and proceed from there.

Step 3: Select an Exchange

To buy royalties, you typically have to go through an online exchange.

Here are some of the top online marketplaces to check out if you’re interested in investing in this space.

Royalty Exchange

Royalty Exchange is a leading royalty marketplace for buyers and sellers. Here you can buy royalties in music, film, books, oil, and pharmaceutical companies.

SongVest is another app that makes it easy to buy and sell royalties. This platform deals solely with music.

This is a great place to invest in new and old albums in a way that is convenient and secure.

Step 4: Research Thoroughly

Once you have an idea of the type of royalty that you want to purchase, the next step is to hunker down and research the targeted asset.

For example, you might find a hit song that you think has long-term playability. But before you put money into it, you should do some market research and try to get a sense of how solid the artist is. During this process, it pays to look into the musician’s reputation, popularity, and customer base.

Try and get a sense of who would play the artist’s music and when. Does the artist have a solid following on social media?

Keep in mind that a song that is wildly popular one minute could easily disappear from the music charts the next minute, reducing its potential to generate revenue.

The main takeaway here is to treat a royalty like any serious investment. Avoid making emotional decisions and make sure the long-term potential looks promising before putting any money into it.

Why Should You Invest in Royalties?

Here are some of the reasons why you might want to invest in royalties.

Generate a Recurring Cash Flow

Royalty streams can be an effective way to put steady money in your pocket without having to go through the trouble of producing something of value — like a song or book — or starting up a restaurant from scratch.

For example, you might structure a music royalty in a way that enables you to get a commission every time someone downloads a song or plays one in a bar. This strategy allows you to use other peoples’ hard work, ideas, and assets as a way to generate income for yourself.

Of course, if you’re a talented musician, you can also sell the rights to a new song you write and produce and receive steady payments for your work without having to play gigs every night.

Obtain Higher-Yield Investments

Another great reason to invest in royalties is you can potentially generate much stronger returns on your investments.

For example, music catalogs often have royalty investments that promote yields of 10% or more.

Diversify your Portfolio

Most investors start by putting money into the stock market and investing in equities, bonds, ETFs, and funds. But once you establish yourself as an investor and build a foundational portfolio, it’s a good idea to branch out and explore some different types of alternative assets .

Royalty assets provide a great way to diversify your portfolio and shield yourself from market volatility. They also give you exposure to different types of investments that can lead to stronger profits.

Frequently Asked Questions

What is a life of rights document.

A life of rights document gives you the right to collect royalties from an asset during the duration of the specified agreement. It’s one of the most critical pieces of documentation that you can collect when buying royalties — and something you should carefully scour before signing.

Are royalties a good investment?

It largely depends on the type of royalty you’re considering. Some royalties can be a great investment, while others can turn out to be complete disasters.

Personally, I prefer to invest in the stock market. But every investor has different goals and preferences.

Where can I buy royalties?

You can secure most royalties through an online marketplace like Royalty Exchange. These apps make the royalty-buying process easy and provide a wealth of insights to help you make informed decisions.

Royalty Investing Can be Risky but Profitable

One of the secrets to making money is to always keep your ears and eyes open for new investment opportunities. Expanding into a different asset class like royalties can boost your income stream and help diversify your portfolio.

However, getting to the point where you can collect royalty payments isn’t easy, and you need to be aware of the risks that come with this type of investment .

Putting money into the music industry or film industry can lead to big gains, but it can also be pretty risky if you don’t know what you’re doing-especially if you invest a lot of money.

The good news is that you could make a small fortune if you play your cards right. But if you play the wrong hand, you could seriously set yourself back financially.

My two cents: Don’t consider royalty investing until you already have a well-rounded, six-figure stock portfolio built up, plus six months’ worth of expenses stashed away in cash .

At the end of the day, you need to remember that there are no shortcuts to prosperity. But if you are willing to hustle and make smart financial decisions, anything is possible.

Here’s to making the smartest decisions on your journey to financial freedom!

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What Is Royalty Income and How Is It Taxed?

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If you've ever created anything — like music , art or literature — and someone else profits from its use, you may be entitled to royalty income. In other words, if others use your work to make money, you get money. Royalties are payments for use of intangible works (not services). You can also receive royalty income through investment in a mineral operation, like gas or oil.

Artists can negotiate their royalties in different ways. For example, you can sell your work (also called property ) to an investor in return for a constant percentage of royalties on the revenue the investor makes. Or you can simply receive a royalty any time anyone uses your property to make money (called licensing .) No matter how or why you receive royalties, the federal government sees them as income , and expects you to report that income on your taxes [source: IRS ].

Taxes paid on royalty income depend on many factors, including the following:

• Whether the creative work is a trade or a business
• The timing and kind of income received
• Who owns the property (an individual or a corporation, for example)

Although there is no blanket equation for royalty taxes, typically royalties received from your work are reported as self-employment income and are taxed at a higher rate. You report these on Schedule C of IRS form 1040. If you earn more than $400 through self-employment, including royalties, you must report that income on your tax return.

Royalties from one-time earnings (a gig that isn't your primary job), or mineral interests, are reported on Schedule E of IRS Form 1040. Let's look at a few real-life examples.

Say you write and publish a book outside of your regular job. In the eyes of the government, you're not self-employed as a writer, so your royalties wouldn't be reported as self-employment under Schedule C. Instead, report them under Schedule E, Supplemental Income. However, if you're a full-time writer, or you regularly revise/update your book, the government considers you self-employed as a writer and you would report your royalties under Schedule C, Profit or Loss from Business [source: Saenz ].

Of course, it's not always so cut and dried. Often, artists receive advance royalties before a work is completed. For example, a record company might pay a songwriter advance royalties of $10,000 for the rights to 10 songs, plus a percentage of proceeds of the songs' sales. But if the songs end up not making any money, the songwriter still gets to keep the $10,000. So even though that money is called advance "royalties," the taxman actually sees that $10,000 as money for services rendered, reported on IRS Form 1099-Misc, Non-Employee Compensation [source: Kelley ].

In the streaming era, musicians earn small royalties every time their song is streamed on services like Spotify and Pandora. Interestingly, streaming royalties are paid to both the performer and writer of a song, while royalties for songs played on the radio are only paid to the writer. The average per-stream payouts are a miniscule $0.006 to $0.0084; [source: Wang ]. In an era of declining royalties, musicians have to get creative to earn a decent living, whether it's with live events, exclusive content to subscribers, advertising deals or selling merchandise.

If you need more guidance on royalties, a tax adviser can point you in the right direction.

Royalty Income FAQ

What is royalty income, are royalty payments tax deductible, are royalties earned or unearned income, is royalty income considered investment income, are royalties a business income, lots more information, related articles.

• Are moving expenses tax deductible?
• Is your hobby income taxable?
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• How Itemized Deductions Work
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• Adkins, W.D. "Royalties Subject to Self-Employment Tax." Houston Chronicle. 2014. (Sept. 26, 2014) http://smallbusiness.chron.com/royalties-subject-selfemployment-tax-12596.html
• Financial Web. "Reporting Royalties In Your Federal Income Tax Schedule." 2014. (Sept. 25, 2014) http://www.finweb.com/taxes/reporting-royalties-in-your-federal-income-tax-schedule.html#axzz3ETO7CD00
• Investopedia. "Royalty." 2014. (Sept. 26, 2014) http://www.investopedia.com/terms/r/royalty.asp
• Kelley, Claudia L., Ph.D., CPA, and Kowalczyk, Tamara, Ph.D., CPA. "Tax Issues for Individuals Who Create Intellectual Property." American Institute of CPAs. Dec. 1, 2014. (Sept. 25, 2014) https://www.thetaxadviser.com/issues/2013/dec/kelley-dec2013.html
• Saenz, George. "Royalties deemed ordinary income." Bankrate. Oct. 11, 2007. (Sept. 26, 2014) https://www.bankrate.com/finance/taxes/reporting-royalty-income-for-textbook.aspx
• Wang, Amy X. "How Musicians Make Money -- or Don't At All -- in 2018." Rolling Stone. Aug. 8, 2018 (Feb. 3, 2021) https://www.rollingstone.com/pro/features/how-musicians-make-money-or-dont-at-all-in-2018-706745/

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What are Royalties & How do Royalty Payments Work?

Table of Contents

Royalty payments are what encourage and protect creativity and inventions around the world. From the photograph hanging on your wall, the song playing from your radio–even the fuel powering your car (which started as crude oil extracted from someone’s land). Royalty payments ensure that the creators and owners of these properties are appropriately compensated.

Essentially, royalty payments are payments received through license agreements or royalty agreements that compensate owners for the use of their intellectual property, creative works, or mineral rights for natural resources like oil and gas extracted from their land. 

Royalties provide cash flow to owners through a legal contract for a royalty-based license that pays a percentage of gross revenue, net sales, or another negotiated rate during the license term. 

This article defines royalties, royalty payments, royalty income, and royalty fees. It provides insights into types of royalties and typical royalty percentages.

What are Royalties?

Royalties are payments that purchase the rights to use, have or make changes to someone else’s property, whether it’s intellectual property or other creative works. The royalty rate is usually negotiated and determined between the licensor and licensee

What Works Can be Copyrighted to Receive Royalties?

The U.S. Copyright Office is used to register and copyright these types of works before publication:

• Literary works
• Performing arts
• Visual arts
• Other digital content
• Motion pictures, and 
• Photographs. 

Types of Royalties

Types of royalties include:

• Songwriters, composers, and their publishers owning the copyright
• Book publishing royalties
• Digital content and social media influencers
•  paid to mineral rights owners with a royalty interest
• Franchise fees in franchising businesses
• Patent royalties

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Royalty Income vs. Royalty Payments vs. Royalty Fees

Royalty payments, royalty income, and royalty fees differ based on the license agreement and the type of royalty.

What is Royalty Income?

Royalty income is the amount received through a licensing or rights agreement for the use of copyrighted works, influencer endorsements, intellectual property like patents, or natural resources like oil and gas properties, often including an upfront payment and ongoing earnings and payments. 

What are Royalty Payments?

Royalty payments are funds paid to owners through a royalty agreement for rights to publish or use copyrighted writing, music, movies, other intellectual property like patents or types of tangible property like oil & gas land for drilling rights. 

What are Royalty Fees?

Royalty fees are amounts earned upfront and subsequently upon making product sales from their licensers or publishers of copyrighted works of literature, music, or other types of property like patents or oil & gas land. In the franchising industry, the franchisee pays the franchise company ongoing franchise royalty fees as a percentage of revenues to remain in the franchise. 

Average franchising royalty fees are 6%, according to franchise industry software provider, FranConnect. 

Royalty Payments and Royalty Income Examples

What are royalties in music.

According to Songtrust, music industry royalties include Composition Royalties, which are performance royalties and mechanical royalties related to physically reproducing, digitally streaming, or downloading musical compositions. Music royalties also include Master Recording royalties for digital performance royalties and master recording revenues. 

Performance royalties are royalty fees paid by public broadcasters and users of copyrighted performance royalties. Triggers include radio stations playing songs or music, movies, television shows, advertisements, and public events with theme songs or music used at political campaign rallies.

ASCAP is the organization for songwriters, composers, and music publishers that helps them register their music and see royalty statements online to collect royalties. BMI is the largest U.S.  non-profit music rights organization that connects songwriters and music owners to the companies and organizations that want to play their music publicly.

Distributors in the music industry, like CD Baby, structure agreements to receive either fixed fees or percentage distribution royalties from the artist’s master recording royalties. 

Book Publishing Royalties

Book publishing companies pay royalties to an author for their copyrighted work when they purchase the rights to publish their book. Published authors receive both advances and future royalties income based on book sales. Once books are sold, the book royalties are payable, then paid once or twice a year, according to the publisher, Penguin books. 

Digital and video content

Companies are turning to online content creators—bloggers, vloggers, dancers, music artists, and more—for a new take on digital marketing. From web videos to blogs, creative partners run the gamut of content specialties and niches. Consider YouTube: creators are producing comedy skits, DIY, daily vloggers, gaming streams, pranks, challenges, cooking videos—and that’s just one video platform! 

The diverse content specialties demonstrate that every collaboration is its own production, which means a standard royalty rate doesn’t exist. In a Collaborator Academy course , YouTube shared a list of various costs to keep in mind when collaborating with a content partner:

Talent: paying for the on-air talent and whether that contract is exclusive, non-commit, or just a talent fee.

Production: the work behind the scenes, such as special effects or on-location fees.

Intellectual property: the rights and terms to use the video for commercial use.

Distribution: placing the content on the websites.

Media amplification: promoting the video collaboration through social channels.

These pricing considerations can also apply to other partnerships with other creators like lifestyle bloggers or songwriters. Understanding the various aspects of producing content will help you develop a productive partnership with creative content creators domestically and abroad.

Under U.S. copyright law , original works receive “copyright protection the moment it is created and fixed in a tangible form that it is perceptible either directly or with the aid of a machine or device.” In other words, any original work produced by a content creator is automatically copyrighted, which gives the creator the right to license the asset and charge royalties for ongoing use of it. The royalty rate is calculated according to specific terms defined in a licensing agreement; the terms include restrictions on geographic distribution, time period, or the number of uses of the licensed asset. A typical calculation for a royalty rate is paying a specific percentage of the sales generated from the asset.

Franchisee to Franchisor Royalties

According to the Small Business Administration (SBA), in franchising, franchisees pay monthly franchise royalties ( franchise fees ) to a franchisor as 4% to 12%+ of gross sales to “own and operate the business.”

Oil and Gas Royalties to Mineral Rights Owners

Oil & gas producers pay royalties to land mineral rights owners monthly based on their royalty interest for production. The royalty payment is the negotiated percentage of gross revenue from production, based on the oil & gas lease. 

Patent Royalties

A patent licensee pays the patent owner for the rights to use the invention based on a negotiated agreement. The patent license may either be a fixed-rate contract or a royalties-based license fee. The arrangement may be exclusive or non-exclusive use of the patent’s intellectual property, providing the know-how to become a licensed product and legal protection. The length of the patent license is determined in the license agreement. 

What is Royalty Payments Tax Treatment in the U.S.?

In the U.S., businesses can generally take a tax deduction for royalty payments as expenses. 

The IRS treats royalty income received as ordinary income reportable either on Schedule E for Supplemental Income and Loss or Schedule C for self-employed individuals. IRS Publication 525 has more detailed information about Taxable and Nontaxable Income. 

Payers report royalties of $10 or more paid to recipients in Box 2 of the information return, Form 1099- MISC . Payers send or file a copy of each form with the IRS, any applicable state, and the recipients to prepare their income tax returns. 

How Do Royalty Payments Work?

Royalty payments are negotiated once through a legal agreement and paid on a continuing basis by licensees to owners granting a license to use their intellectual property or assets over the term of the license period. Royalty payments are often structured as a percentage of gross or net revenues. 

What is a Royalty Deal?

A royalty deal is when an investor gives funds to a company–not the individual–in exchange for a certain percentage of total sales. For example, let’s say an investor invests in a clothing company and receives 5% of gross sales. This means the investor earns $2.50 on every $50 shirt sold. 

Example of Automated Royalty Payment Processing

Because royalty payments are made to many payees at once, using a system for mass payment automation is essential to streamline the process. 

Lean operations are the ideal in many industries, but it’s critical for companies that deal with digital creative services.

Izo, Digital Media Firm, Automates Tax Identification Process

Izo, the parent company of Dance On, is well aware of the challenge. The Los Angeles-based digital media firm partners with thousands of dance groups around the world to produce videos aimed at Millennial and Gen-Z audiences. Izo’s influence network is best known for creating dance music videos to Silentó’s “Watch Me (Whip/Nae Nae),” helping propel it as the top trending song in 2015.

That’s the heart of its business—collaborating and distributing content—but Izo knew that cumbersome back-end processes would distract the company from its focus.

“For a lot of early-stage digital media entertainment companies, in order for them to become cashflow positive, it behooves them to run very lean,” Izo Chief Finance Officer Dan Steinberg told Tipalti. “Digital media involves much more guerrilla approaches to production. You’re filming a lot more with lower budgets, and ideally employing data-driven approaches to extend the value of content.”

With the help of the Tipalti mass payment platform , Izo improved its royalties payment workflow by automating tasks related to tax identification. Previously, Izo had to request, collect, and validate the tax identification of its growing community of content creators. But after implementing the Tipalti platform, new artists and partners were able to complete digital IRS W-9 and W-8 documents through Tipalti’s onboarding portal. The streamlined workflow reduced the paperwork for partners and Izo management, enabling the company to run a lean finance operation.

“From our partners’ standpoint, the process is smooth and transparent,” Steinberg said. “We don’t hear complaints. That’s the golden indicator that nothing is going wrong, and that’s the payment experience you want.”

Use Automation to Create a Lean Finance Operation

Simply put, automation is the key to unlocking the secret behind global creator and royalty payments. A lean finance operation enables Izo to put its business growth efforts where it matters most: growing its influencer network, creating exciting new content, and connecting with new audiences.

Why put geographic limits on creative collaboration and marketing reach? Automation is the key to unlocking the secret behind growing your global creator network while scaling your royalty payment capabilities. A mass payment platform like Tipalti takes on the manual tasks, such as verifying country-specific tax compliance, and keeps you focused on partnering with influencers and other creatives without geographic limitations.

That Germany-based video creator you’ve been dying to partner with? You can now reach out in confidence, knowing your business operations will support global partners.

Creative partners are the driving force of change, continually serving up new ways to share information or tell stories. Lean business operations using automation enable media producers to focus on where it matters: producing innovative content with the growing community of creatives around the world.

Conclusion – Royalties and How Royalty Payment Works

Businesses and organizations pay royalties to owners to use their creative works and pay owners for their intellectual property or ownership interests like mineral rights. Users pay royalties based on the terms of a legal license agreement. A royalty payment received by licensees is royalty income to the recipient, subject to U.S. ordinary income taxation. 

Streamlining the royalty payment process with AP automation software significantly increases business efficiency. If your business pays royalties, refer to this link to find out how to make royalty payments efficiently to attract and retain creative talent. 

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What Are Royalties?

How royalties work, examples and types of royalties, frequently asked questions (faqs).

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Royalties are payments to owners of property for use of that property. Royalties often deal with payments for the right to use intellectual property (IP) such as copyrights, patents, and trademarks.

Key Takeaways

• Royalties are payments that buy the right to use someone else's property.
• Licensing agreements outline the details of royalty payments.
• Royalty payments may cover many different types of property, including patented inventions, the use of artwork, or the mining of resources.
• Royalties may be reported as business income or expenses.
• Typically, you have to report royalties on Schedule E when you file your taxes.

Royalties are payments that buy the right to use someone else's property. Royalties stem from licensing, which is the process of giving or getting permission to have, produce, or use something that someone else has created or owns.

In other words, when you keep the ownership of the property and get royalties from someone for use of that property, that is licensing. Licensing your business's intellectual property and getting royalties from these licenses is a common way to increase your business income. Royalties also protect the buyer from claims by the owner for improper use.

Royalty fees and payment amounts can be set in a variety of ways. For example, in a franchise situation, fees can be set as a fixed or variable percentage of gross sales. In many cases, there is a minimum royalty. Some common forms of royalty payments include:

• Royalties for specific products (like a book, a piece of music, a patented product, or a concert); these are generally based on the number of units sold.
• Royalties for oil, gas, and mineral properties; these may be based on either revenue or on units, such as barrels of oil or tons of coal.

A variable percentage is often used for newly created IP. In this case, the royalty percentage might be small in the beginning because sales are low. As sales increase, the royalty percentage might increase to a maximum amount.

Some royalties are paid for public licenses. The Copyright Office collects royalty fees in several scenarios, including:

• Cable operators retransmitting TV and radio broadcasts
• Satellite carriers retransmitting network and non-network signals
• Distribution of digital audio recording devices and media

Each type of royalty payment has benefits and drawbacks for each party. The owner of the property will negotiate the specifics of royalty payments with potential buyers as they create a contract.

While royalty contracts differ depending on the type of royalty, there are some common features in royalty contracts.

The contract will include a detailed description of the subject matter (the property) and who owns it. For example, if you are selling the right to use a group of your images to an online image company such as Getty Images, you would describe your images in detail (maybe with a listing), then the following references to the photos could simply call them "the Images." 

The contract will detail the scope and limits of the use of the property. For example, you might allow someone just one-time use, or you might allow perpetual use of your images.

The contract will also include the payments (the royalties themselves). The section covering payments should include:

• When the payments are to be made
• How the amount of payments is determined
• How records are to be kept
• Any advance payments

The contract could also establish an " earnout " arrangement that bases royalty payments on the performance of the property being licensed. In an author contract, for example, there may be an advance. When the author's portion of royalties from book sales exceeds the amount of the advance, the author will begin receiving additional royalty payments.

Like other legal business contracts, licensing and royalty contracts may vary based on state laws. Check with an attorney who practices in your state to get more details.

Like other forms of payment in a business, royalties are taxable income and also a business expense.

If you receive royalties from someone for use of your property, you must claim these payments as business income, usually on Schedule E (Form 1040). Royalties from copyrights, patents, and oil, gas, and mineral properties are taxable as ordinary income. In general, any royalties you receive are considered as income in the year you receive them.

If you are paying royalties or licensing fees, these payments might fall under legitimate  business expenses . If the payments are for the purchase of property, the property becomes an asset on your business balance sheet, and the payments might need to be  amortized . If you pay more than $10 in royalties in a year, you must give the payee a 1099-MISC form to show the total of your payments for the year.

The question of how this expense is entered on your business tax return depends on the specifics of your situation. Before you attempt to include any of these royalties or licensing fees as expenses, check with your tax professional.

In music, royalties are paid to owners of copyrighted music. These are called performance royalties. You may pay this royalty if you want to play a song on your radio station or use the song in your movie.

A musician may register a trademark or copyright with a private performing rights organization (PRO) such as ASCAP or BMI. The PRO assumes responsibility for collecting royalties, then it distributes the royalties to the owner.

Royalties may be paid for the use of images, such as when you want to add stock photography to your website. Another type of royalty is a book royalty, which publishers pay to authors for every book they sell.

If someone wants to make or use a patented product, like a new invention, they will have to pay a royalty to the person who owns the patent.

In franchised businesses, such as 7-Eleven convenience stores, the franchise holder pays franchise royalties to the main company for the use of the name and other assets.

Royalties may also be paid in the context of rights to take minerals from the property of someone else. These are often called mineral rights, rather than royalties, but they work the same way. For example, oil and gas producers in the U.S. pay a royalty of 12.5% of production value for onshore operations.

What are examples of royalties?

Royalties can be paid out to an author for books sales, a songwriter for a song, or to a musician for an album.

How are royalties paid?

Royalties can be paid at a flat percentage of sales, for example, or via a variable percentage rate that starts out lower and increases as sales of the property increase.

IRS. " Publication 525: Taxable and Nontaxable Income ." Page 17.

Royalty Rates. " Intellectual Property Royalties—Everything You Need To Know ."

Copyright Office. " Circular 75: The Licensing Division of the Copyright Office ." Page 1.

The Steve Laube Agency. " The Myth of the Unearned Advance ."

Contracts Counsel. " Royalty Agreement ."

CCH AnswerConnect. " Business Expense Deductions for Rents and Royalties ."

IRS. " About Form 1099-MISC, Miscellanious Income ."

Department of the Interior. " Revenues ."

• Royalty and Residual Income Management

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on January 24, 2024

Get Any Financial Question Answered

Table of contents, what is royalty and residual income management.

Effective royalty and residual income management are essential for maximizing earnings, ensuring financial stability, and growing wealth over time. Proper management involves tracking income sources, negotiating favorable agreements, and implementing tax and investment strategies .

Royalty income refers to the earnings generated from the use or sale of intellectual property, such as patents, copyrights, and trademarks. Royalty income is typically received by the creator or owner of the intellectual property in exchange for granting others the right to use or sell their creations.

Residual income, also known as passive income , is the money earned on a regular basis with little to no effort required to maintain the income stream. Examples of residual income sources include rental properties, dividend stocks, and income from network marketing.

Generating Royalty and Residual Income

Intellectual property royalties.

Patents grant inventors the exclusive right to make, use, or sell their inventions for a limited period, typically 20 years. Patent owners can earn royalty income by licensing their inventions to others or by selling their patented products.

Copyrights protect original works of authorship, such as books, music, and films. Copyright holders can earn royalty income by licensing their works for reproduction, distribution, or public performance.

Trademarks protect brand names, logos, and other distinctive marks used in commerce. Trademark owners can earn royalty income by licensing their marks for use by other businesses.

Artistic Works

Musicians, composers, and songwriters can earn royalty income from various sources, including record sales, streaming services, and public performances of their music.

Books and Literature

Authors and publishers can earn royalty income from the sale of books, e-books, and audiobooks, as well as licensing their works for adaptation into films, television shows, and other media formats.

Visual artists can earn royalty income from the sale or licensing of their artwork, such as paintings, sculptures, or photographs.

Franchising and Licensing

Business owners can earn residual income by franchising their business models or licensing their products and services to other businesses.

Real Estate Investment Trusts

Investors can earn residual income from real estate investment trusts (REITs) , which own, manage, and lease income-producing properties. REITs typically distribute their income to shareholders in the form of dividends .

Network Marketing and Affiliate Marketing

Individuals can earn residual income through network marketing or affiliate marketing by promoting and selling products or services offered by other businesses.

Tracking and Monitoring Royalty and Residual Income

Record-keeping systems.

Maintaining accurate and up-to-date records of royalty and residual income sources is crucial for effective income management. Record-keeping systems can include spreadsheets, financial software, or specialized accounting tools.

Royalty and Residual Income Statements

Regularly reviewing royalty and residual income statements can help ensure accurate reporting and timely payment of earnings. These statements typically include information on income sources, payment dates, and amounts.

Auditing and Verification

Periodically auditing and verifying royalty and residual income payments can help identify discrepancies or underpayments, ensuring that income is accurately reported and received.

Industry-Specific Accounting Software and Tools

Using industry-specific accounting software and tools can help streamline the tracking and management of royalty and residual income sources, ensuring accurate and efficient record-keeping.

Tax Implications and Planning

Reporting royalty and residual income.

Royalty and residual income must be reported on individual or business income tax returns. Proper record-keeping and accurate reporting of income and expenses are essential for ensuring compliance with tax laws.

Deductible Expenses

Taxpayers can deduct certain expenses related to earning royalty and residual income, such as licensing fees, legal fees, and other business-related expenses . Understanding and maximizing deductible expenses can help minimize tax liabilities.

Tax Strategies and Planning

Effective tax planning can help individuals and businesses manage their tax liabilities related to royalty and residual income. Strategies may include structuring income streams to minimize taxes, utilizing tax-deferred investment accounts, or leveraging tax credits and deductions.

Impact of Tax Law Changes

Staying informed about changes to tax laws that may impact royalty and residual income is essential for effective income management. Adjusting income strategies to account for tax law changes can help ensure continued financial success.

Negotiating Royalty and Residual Income Agreements

Factors affecting royalty rates.

Various factors can affect royalty rates, such as the type of intellectual property, the size of the market, the licensee's experience, and the exclusivity of the agreement. Understanding these factors can help individuals and businesses negotiate favorable royalty rates.

Licensing and Royalty Agreements

Licensing and royalty agreements should clearly outline the terms of the arrangement, including payment terms, duration, and any restrictions on the use or sale of the intellectual property. Properly drafted agreements can help ensure fair compensation and protect the rights of both parties.

Legal Considerations and Protections

Seeking legal advice when negotiating and drafting royalty and residual income agreements can help ensure that the agreements comply with applicable laws and protect the rights of both parties.

International Agreements and Cross-Border Royalties

When dealing with international agreements and cross-border royalties, it is essential to consider differences in legal systems, currency exchange rates , and tax implications. Consulting with legal and financial experts familiar with international transactions can help navigate these complexities.

Managing Royalty and Residual Income Streams

Diversifying income sources.

Diversifying royalty and residual income sources can help manage risks and ensure financial stability. Building a diverse portfolio of income-producing assets can provide a more consistent and reliable income stream.

Adjusting to Market Trends and Changes

Monitoring market trends and adjusting income strategies accordingly can help individuals and businesses capitalize on new opportunities and maintain financial success.

Ensuring Timely Payments and Collections

Implementing efficient payment and collection processes can help ensure consistent cash flow from royalty and residual income sources. This may involve using payment processing tools, invoicing systems, or collection agencies.

Managing Disputes and Conflicts

Effectively resolving disputes and conflicts related to royalty and residual income can help maintain positive relationships with licensors, licensees, and other stakeholders . This may involve negotiation, mediation, or legal action, depending on the nature of the dispute.

Financial Planning and Wealth Management

Budgeting and cash flow management.

Developing a budget and managing cash flow is essential for effectively managing royalty and residual income. A budget can help identify income trends, track expenses, and plan for future financial goals .

Savings and Investment Strategies

Investing a portion of royalty and residual income in savings and investment vehicles can help grow wealth and achieve long-term financial goals. Consideration should be given to factors such as risk tolerance , investment time horizon , and financial objectives when developing investment strategies.

Retirement Planning

Incorporating royalty and residual income sources into retirement planning can help ensure a comfortable and secure retirement . Retirement planning should consider factors such as projected income needs, life expectancy, and inflation.

Estate Planning and Wealth Transfer

Effective estate planning can help ensure that royalty and residual income-producing assets are transferred to heirs or beneficiaries according to the individual's wishes. Estate planning strategies may involve the use of trusts , wills , or other legal instruments.

Protecting Intellectual Property and Assets

Intellectual property registration and enforcement.

Registering and enforcing intellectual property rights, such as patents, copyrights, and trademarks, is crucial for protecting and maximizing royalty income.

This may involve filing applications with government agencies, monitoring potential infringements, and pursuing legal action when necessary.

Monitoring Potential Infringements

Regularly monitoring the marketplace for potential infringements of intellectual property rights can help ensure that royalty income is protected. Monitoring may involve conducting online searches, subscribing to industry publications, or utilizing specialized monitoring services.

Legal Recourse and Remedies

Pursuing legal recourse and remedies for intellectual property infringements can help protect royalty income and deter future violations. Legal remedies may include obtaining injunctions, recovering damages, or pursuing criminal charges in cases of willful infringement.

Cybersecurity and Digital Asset Protection

Implementing cybersecurity measures and protecting digital assets, such as copyrighted works or licensed software, can help safeguard royalty income sources. This may involve using encryption, secure file storage, or access controls to prevent unauthorized use or distribution of digital assets.

Leveraging Royalty and Residual Income for Growth

Reinvesting income for business expansion.

Reinvesting a portion of royalty and residual income back into the business can help fuel growth and expansion. This may involve developing new products or services, expanding into new markets, or acquiring complementary businesses.

Acquiring Additional Income-Producing Assets

Acquiring additional income-producing assets, such as real estate, businesses, or intellectual property, can help grow and diversify royalty and residual income streams.

Careful analysis of potential acquisitions and a clear understanding of the associated risks and rewards are essential for successful expansion.

Networking and Strategic Partnerships

Building a network of contacts and forming strategic partnerships can help individuals and businesses identify new opportunities for generating royalty and residual income.

Networking can be accomplished through attending industry events, joining professional organizations, or participating in online forums and social media groups.

Building a Personal Brand and Reputation

Developing a strong personal brand and reputation can help attract new opportunities for generating royalty and residual income.

This may involve creating a professional website, publishing articles or books, speaking at conferences, or leveraging social media to build a following and establish credibility.

Effective royalty and residual income management is crucial for achieving financial success and realizing the full potential of income-producing assets . A well-planned income strategy can provide consistent cash flow, capital appreciation, and financial stability .

By understanding the key factors involved in generating and managing royalty and residual income, individuals and businesses can develop strategies to maximize their income potential.

These strategies may include diversifying income sources , negotiating favorable agreements, and implementing tax and investment planning.

Regular monitoring and adjusting of royalty and residual income strategies are essential for maintaining financial success in a changing marketplace.

Ongoing management and planning can help individuals and businesses navigate challenges and seize new opportunities, ensuring continued growth and prosperity.

Royalty and Residual Income Management FAQs

What is royalty and residual income management.

Royalty and residual income management involves the management and distribution of income generated from intellectual property rights, such as patents, copyrights, and trademarks.

What types of income fall under royalty and residual income management?

Income that falls under royalty and residual income management includes royalty payments, licensing fees, residuals from creative works, and other forms of passive income generated from intellectual property.

What are some strategies for managing royalty and residual income?

Strategies for managing royalty and residual income include negotiating favorable licensing agreements, diversifying income streams, protecting intellectual property rights, and investing in other income-generating assets.

How is royalty and residual income taxed?

Royalty and residual income is generally taxed as ordinary income at the recipient's marginal tax rate. However, there may be deductions and credits available to offset the tax liability.

What are some risks associated with royalty and residual income management?

Risks include changes in the market for intellectual property rights, expiration of patents and copyrights, infringement by competitors, and changes in tax laws. It is important to have a contingency plan in place to address these risks and to consult with a financial or legal professional to ensure that royalty and residual income management is aligned with long-term financial goals.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Royalty Income: What Is It & How Is It Taxed?

Royalty income can be defined as a form of payment received by individuals or businesses as a payment for the use of intellectual property, such as copyrights, trademarks, patents, or mineral rights.  

Individuals and businesses can efficiently manage their tax obligations and improve their financial outcomes by understanding how royalty income is taxed. The aim of this article is to define what royalty income is and how it is taxed. We will also find out how it is reported—what is needed to report it, the deductions available and any other factors that might be important enough to those that receive this form of income.

What is Royalty Income?

Payments made to people or organizations for the lawful use of their intellectual property are referred to as royalties. Inventions, trademarks, brand names, literary, artistic, musical, and scientific works, as well as rights to the exploitation of natural resources, are all examples of intellectual property.

Royalties are typically paid out as a result of agreements made in contracts, leases, or licenses with people, companies, or organizations who want to use the intellectual property for profit. Book or song royalties, software licensing fees, franchise fees, patent licensing, and royalties from mineral extraction are  all examples of common sources of royalty income.

How is Royalty Income Taxed: What is Its Classification?

For tax purposes, royalty income is typically categorized as ordinary income. Normally, royalty income is subject to self-employment tax, state income tax, and federal income tax for people who are self-employed (if applicable). This type of income is declared on the proper tax forms, such as Schedule C (Profit or Loss from Business) for self-employed people or Schedule E (Supplemental Income and Loss) for individuals.

Reporting Royalty Income and Calculating Deductions 

Royalty income must be accurately reported on tax returns by individuals who receive it. They must fill out the appropriate tax forms with information about the received income, including the payer's name and tax identification number. It is crucial to keep accurate records of all royalties paid out as well as any related costs incurred to produce that income.

Legal fees for defending intellectual property, the price of creating or improving the intellectual property, marketing and promotion costs, and some administrative costs are examples of deductible expenses. These deductions may reduce the overall tax obligation by offsetting the taxable royalty income.

Withholding and International Considerations

In some cases, royalty income payers must withhold taxes at the source before sending payments to non-resident recipients. Depending on the tax agreements between nations, the withholding tax rates could vary. Non-US residents who receive royalties from sources based in the United States may be required to withhold tax under the Internal Revenue Code and may be required to file particular tax forms, such as Form W-8BEN.

Individuals who receive royalties from foreign sources should consider how their income will be taxed in both their home country and the country where they received the royalty income. To ensure compliance and prevent double taxation, it is vital to comprehend the tax laws and regulations of each jurisdiction that is involved.

For owners of intellectual property, royalty payments are a valuable source of income, but they have tax ramifications that must be carefully considered. Understanding the nature of royalty income and its tax treatment is crucial for individuals and businesses looking to fulfill their reporting obligations thoroughly and optimize their financial outcomes.

With this, you should have no problem understanding royalty income and how it pertains to your tax filing. Working with a tax professional can help you navigate the complexities of royalty income taxation as well as receive personalized advice based on your unique situation.

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What Is a Royalty?

Understanding royalties, types of royalties, special considerations, examples of royalties, the bottom line.

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What Is a Royalty? How Payments Work and Types of Royalties

A royalty is a legally binding payment made to an individual or company for the ongoing use of their property, including copyrighted works, franchises, and natural resources. Royalties can be collected for tangible and intangible assets.

An example of royalties would be payments received by musicians when their original songs are played on the radio or television, used in movies, performed at concerts, bars, and restaurants, or consumed via streaming services. In most cases, royalties are revenue generators specifically designed to compensate the owners of songs or property when they license their assets for another party's use.

Key Takeaways

• A royalty is an amount paid by a third party to the owner of a product or patent in exchange for its use.
• The terms of royalty payments are laid out in a licensing agreement.
• The royalty rate (the amount of the royalty) is typically a percentage based on factors such as the exclusivity of rights, technology, and the available alternatives.
• Royalty agreements should benefit both the licensor (the person receiving the royalty) and the licensee (the person paying the royalty).
• Investments in royalties can provide a steady income and are considered less risky than traditional stocks.

Investopedia / Jessica Olah

Royalty payments typically constitute a percentage of the gross or net revenues obtained from the use of property. However, they can be negotiated on a case-by-case basis according to the wishes of both parties.

Who Would Use a Royalty System?

An inventor or original owner may choose to sell their product to a third party in exchange for royalties from the future revenues the product may generate. For example, computer manufacturers pay Microsoft Corporation royalties for the right to use its Windows operating system in the computers they manufacture.

Third parties pay authors, musical artists, and production professionals for using their produced, copyrighted material. Television satellite companies pay royalty payments to air the most viewed stations nationwide. In the oil and gas sectors, companies pay landowners royalties for permission to extract natural resources from their covered property.

Payment and Benefits

Payment may be nonrenewable resource royalties, patent royalties , trademark royalties, franchises, copyrighted materials, book publishing royalties, music royalties, and art royalties. Well-known fashion designers can charge royalties to other companies for using their names and designs.

Royalty agreements should benefit both the licensor (the person receiving the royalty) and the licensee (the person paying the royalty). For the licensor, a royalty agreement to allow another company to use its product can allow them access to a new market. For the licensee, an agreement may give them access to products they could not access otherwise.

Royalty payments may cover many different types of property. Some of the more common types of royalties:

• Book royalties : Paid to authors by publishers. Typically, the author will receive an agreed amount for every book sold.
• Performance royalties : The owner of copyrighted music receives an amount whenever the music or song is played by a radio station, used in a movie, or otherwise used by a third party.
• Patent royalties : Innovators or creators patent their products. Third parties typically enter into a licensing agreement requiring them to pay royalties to the patent owner.8
• Franchise royalties : A franchisee, a business owner, will pay a royalty to the franchisor for the right to open a branch under the company name
• Mineral royalties : Mineral royalties are paid by mineral extractors to property owners.

Licensing Agreements

The terms of royalty payments are laid out in a licensing agreement . The licensing agreement defines the limits and restrictions of the royalties, such as its geographic limitations, the duration of the agreement, and the type of products with particular royalty cuts. Licensing agreements are uniquely regulated if the resource owner is the government or if the license agreement is a private contract.

Royalty Rates

In many licensing agreements, royalty rates are defined as a percentage of sales or a payment per unit. Rates may also be a factor of:

• Innovation levels of the products
• The exclusivity of rights
• Available alternatives
• The business model
• The demand level
• Market demand
• Risks involved
• Gross margin

To accurately estimate royalty rates , the transactions between the buying and selling parties must be willingly executed. In other words, the agreements must not be forced. Furthermore, all royalty transactions must be conducted at arm's length, meaning that both parties act independently and have no prior relationship.

According to UpCounsel, a nationwide legal services company, the industries with the highest average royalty rates are software (9.6%), energy and environment (8%), and healthcare equipment and products (6.4%). The industries with the lowest average royalty rates are automotive (3.3%), aerospace (4%), and chemicals (4.3%).

Book writers typically receive a share of the proceeds from the sales of their books. For instance, an agreement between a publisher and writer might be that the author receives 15% on net sales of hardbacks and 7.5% on net sales of paperbacks.

Franchises are another example where royalties are used. For instance, an individual can pay to open a restaurant franchise like McDonald's. A franchisee of the McDonald's Corporation has a typical initial down payment of 40% of the total for a new restaurant or 25% of the total for an existing one. Additionally, an initial franchise fee of $45,000 is paid to the McDonalds corporation.

After purchasing the franchise, the owner must then make ongoing royalty payments of 4%–5% of monthly sales and pay rent, which is either a base amount or a percentage of monthly gross sales.

What Are Royalties in Business?

Royalties are designed to protect the intellectual property rights of a company. A company might file a patent on an innovation, so a third party must pay them a fee to use it. Intellectual property can be in the form of copyrights, patents, and trademarks.

What Are Royalty Investments?

Typically, an investor may receive a regular monthly or quarterly payment based on a company’s sales. These investments are considered less risky than traditional stocks because they are not dependent on the stock market or interest rates. Also, royalty investments add diversity to a portfolio. Like stock, royalties can be bought and sold.

What Are Royalty Interests?

Royalty interest applies to mineral rights agreements. A royalty interest entitles the mineral rights owner to receive a portion of the minerals produced or a portion of the gross revenue from sold production.

What Is a Royalty Agreement?

A royalty agreement is a legal contract between a licensor and a licensee. It grants the licensee the right to use the licensor’s intellectual property in exchange for royalty payments. The agreement will show the royalty rate and terms. It will also state the parties involved, the rights granted, and the period of use.

Royalties are a way for creators, innovators, intellectual property owners, or landowners to earn money from their assets. Royalties are agreements or licenses that lay out the terms by which a third party can use assets that belong to someone else.

Royalties can be earned on books, music, minerals, franchises, and many other assets. Some royalty agreements are for a set period, while other royalties are earned in perpetuity.

UpCounsel. " Patent Licensing Royalty Rates: Everything You Need to Know ."

McDonald's. " The Financials ."

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INCOME SERIES #7: Royalty Income – How to Turn Your Ideas Into Money

Watch video below:

Royalty income is the money you get paid for the use of your property. Property in this case can include intellectual properties and real properties such as ideas, products and processes. Royalty income can include payments for the use of literary works, artistic works, copyrights, trademarks, patents and more. Owning properties such as timber, oil, and gas also generates royalty income.

So, how can you exploit these properties and turn your ideas into money? Here are a few examples you can easily exploit and get paid for their use:

How to Turn Your Ideas Into Money

Build a strong repeatable business model.

Let me start with building a strong repeatable business model. You may think you are not a business person; but if you have the idea and the knowledge for a strong business model, you can create this model and test-run it. Once the model is proven to be strong and easily repeatable, you can sell it to those who wish to use it in the form of franchise. McDonald as an example built a strong business model that is easily repeatable. Majority of its restaurants are operated and owned by franchisees; who pay a lot of money in franchise fees just to use its processes, logo and marketing. This is royalty income to McDonald.

If you can build a strong repeatable business model, go for it. You will build wealth not only from earned income or profit income, but also from royalty income. However, if you do not have the capital or skill requirements to establish a strong repeatable business model, there are other ways you can benefit from royalty income.

Write a Book

What do you have intensive knowledge of? Have you thought about writing a book on it? When you publish a book, the money you get paid for every copy of the book sold is royalty income from the book. The money might not be a lot, but the good thing is that once the book is published, you will continue to get paid royalty income each time a copy is sold.

Blogs/Vlogs

Think you can’t get to writing a book? Or not sure how to begin, just start writing piece by piece and ideas will start to flow; or better still, start writing blog posts. As you continue to write blog posts, you will begin to see ideas for your book will begin to take shape. With time and as your readership and viewership begin to increase, you may start to earn some royalty income from your blogs/vlogs as well.

Another option is to innovate and patent a product. Do you have an idea you can turn into a unique product and be patented? Go for it!

Develop a Software/Mobile Application

Can you develop a software? Or do you have an idea of a process that can be built into a mobile app? Go for it! You do not have to develop the app yourself, all you need to do is to articulate your ideas and contact a developer. If you own a software, the payments you receive for letting people use the software is your royalty income.

Artistic Works: Sketches/Illustrations

The artists are not left out, your sketches, and illustrations can pay you royalty income. You can start with friends and family members, and then ask for referrals.

These are just a few ways you can benefit from royalty income, there are many more.

Are you already earning royalty income? Let me know what you think or other ways one can earn royalty income in the comment below.

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The Impact Investor | ESG Investing Blog

Investing for financial return is only part of the equation.

How to Invest in Royalties: A Step-by-Step Guide

Updated on May 9, 2024

Our posts may contain links from our affiliate partners. This supports helps support the site as we donate 10% of all profits to sustainability organizations that align with our values. However, this does not influence our opinions or ratings. Please read our Terms and Conditions for more information.

For investors looking to further diversify their portfolios beyond the stock market and establish lucrative new revenue streams, royalty investing can be an exciting and rewarding venture with many benefits.

Royalty rights tend to provide a very steady income, especially on a long-term basis. And in comparison to the bond market and other types of equity, royalty income is fairly immune to the usual risks and fluctuations that come with investing. A potential royalty investor also has lots of options as to the types of royalties they can purchase.

But before you dive into the wide, wonderful world of royalty investments, it’s important to get a handle on the basics. Here’s an overview of everything you need to know to get started on the right foot.

Table of Contents

What Are Royalties?

Investing in royalties 101: key types to consider, copyright royalties, performance royalties, other types of music royalties, mineral royalties, patent royalties, mechanical royalties, franchise royalties, how to buy royalties and get royalty income, 1. thoroughly assess the risks, 2. decide on a type of royalty investment, 3. find the right royalty exchange, 4. research assets before investing, 5. diversify your royalty portfolio, 6. continue researching new targets, what are the best reasons to invest in royalties, steady passive income, tap into higher-yield investment options, diversify your portfolio effectively, royalty investing faqs, are royalties a good investment, what is the easiest way to buy royalties, what are the cons of royalty investment, how long do music royalties last, are royalties taxable income.

Royalties are among the more popular alternative investments out there. They are payments made to a person, company, or other entity in exchange for the use of an asset of value.

Royalty rates can vary greatly from one setup to another and are typically the result of negotiations between the property owner and the potential licensee. Once agreed upon, the terms of licensing agreements are binding.

Royalties can differ greatly as far as how they’re paid, as well. Some royalty payments cover a sales percentage spanning a specific period of time (including one that’s perpetually ongoing). Others are by-the-unit payments, as is occasionally the case with books or music albums.

Collectively speaking, royalty income ideas can cover a lot of ground. Some commonly known and sought-after examples include certain intellectual property, copyrighted music catalogs, and copyrighted books.

But those interested in royalty assets can also invest in private equity , oil and gas, invention patents, and more. Here’s a closer look at what’s out there.

These are among the most popular types of royalties and can cover options like music, books, art, and much more. There are also many different ways to seek royalty income via copyrighted material.

Investors can choose to invest in individual works — such as a particular song by a popular artist, a music album that’s really blowing up, or a brand-new novel by a hot author — or entire catalogs by particularly successful creators. It’s also possible to invest in proven classics — like movies and classic songs everyone knows.

Every time you hear a particular song played anywhere — whether that’s your favorite restaurant, the frozen food section at the supermarket, or a shop downtown — the individual or entity doing the playing must pay performance royalties to the artists and rights holders.

The same goes for radio stations and streaming services like Spotify, Tidal, and Apple Music.

In addition to collecting revenue via streaming services, radio, and similar avenues, music rights holders also sometimes sell the rights to reproduce music in print. Think physical or digitized sheet music, guitar tabs, and similar options.

Synch royalties are also a thing. That’s when music appears as part of an audiovisual piece, such as a television advertisement, a movie, or an episode of a television show.

Although it may not be the first possibility to come to mind when a person thinks about investing in royalties, it’s definitely possible (and potentially lucrative) to invest in natural resources like oil and gas via options like mineral royalties, gas royalty trusts, and royalty interests.

Mineral rights allow someone to extract salable resources from another person’s land. For that reason, you’ll sometimes see property owners with valuable land assets sell royalty licenses to natural gas companies and other entities to generate extra income.

See Related: What Is an Overriding Royalty Interest: Definition and Examples

If you’ve ever wondered how professional inventors make money, patents are the answer. The inventor brainstorms a wonderful idea for a potentially successful product or technique, patents it, and then sells licenses to use what they came up with.

As a would-be investor, you can invest in intellectual property you believe in via patent royalties.

Mechanical royalties are similar to other music royalties in that they’re fees paid in exchange for the right to reproduce a song or other composition.

Situations where mechanical royalties would come into play include download-to-own interfaces, as well as situations where digital or physical album sales occur.

When brand owners decide to convert their businesses into franchises, they sell the rights to open additional semi-independent businesses under that same brand.

This happens frequently in certain industries, including retail and fast food, as with McDonald’s , Burger King, Target, 7-11, etc.

Although even new investors usually have a solid understanding of the stock market, the idea of generating cash flow via an alternative investment like royalties can seem out of reach at first.

However, it’s much easier to sell royalties, buy royalties, and generate revenue that way than most people think. Here’s a step-by-step rundown that addresses how to get started.

All investment types — including dividend-paying stocks — come attached to some risk, and royalty investing isn’t an exception. That said, it’s important to make sure you truly understand what those risks are before you dive in and buy royalties.

Valuation risk

Valuation risk is a factor that always comes with investing in music royalties and other types of entertainment royalties. The term refers to the possibility of overvaluing and overpaying for someone else’s creative property.

Taking care not to allow emotional attachments to creative material and intellectual property can help investors avoid falling victim to this.

Counterparty risk

Counterparty risk refers to the possibility of buying an asset from someone who doesn’t actually have the right to sell it in the first place. For this reason, prospective royalty investors should always double-check legal ownership before putting their money down.

Additional risks to consider

Many other factors can affect the price, value, or availability of royalty assets, as well. Examples include (but aren’t necessarily limited to) emerging technology, inflation, ever-changing industry policies, and more.

That said, always do thorough research before investing in music royalties or any other royalty assets. Double-check the current market value of a particular option before investing in royalties, and avoid developing emotional attachments to assets that may affect your ability to make wise decisions.

Remember, opportunities to pursue royalty streams and earn more money go well beyond entertainment industry options, music royalties, etc. You can just as easily explore venture financing, natural gas royalty interest, and more.

The best move is generally not to overcomplicate the process. In other words, stick to what you know, especially in the beginning. And focus on areas you’re genuinely interested in.

For example, are you knowledgeable about publishing? Going into copyright investing might be a good initial investment decision. Or perhaps you’re a massive music lover or someone with hands-on record label experience. If so, definitely take a closer look at music industry options.

Meanwhile, technological innovation whizzes might want to look at intellectual property. Food lovers or those with restaurant experience can likewise explore franchise options. You get the picture.

There’s plenty of time to break into other ways to invest in royalties and further boost your royalty flow later on when you’re more experienced.

See Related: How to Invest in Private Equity

Investing in royalties is similar to stock market investing and similar options in that it’s usually done via a dedicated exchange. A royalty exchange is an online marketplace where you can explore, purchase, and sell different royalty options.

Although which royalty exchange website is right for you depends largely on your needs and preferences, it’s important to fully vet your options.

Explore how each choice works to see whether you like the interface. Do comparative research to get a feel for how others interested in royalty income liked their experiences, as well.

Some popular royalty exchange options to consider include the following:

• Royalty Exchange : Marketed as the world’s largest royalty marketplace, Royalty Exchange operates similarly to stock market exchanges you may be familiar with. Potential buyers interested in a rights holder’s full or partial body of work bid on the royalty. The winner walks away with the ability to claim future royalty income.
• SongVest : Just as individual stocks can be sold and invested in as package deals, songs, albums, and other music-related assets can be bundled into IPOs — SongVest’s specialty. IPOs earn money for SongVest investors each time an associated song or composition is played, sold, or purchased.
• Royal : Royal investors who choose Royal as their exchange of choice receive tokens that correlate to a particular streaming revenue percentage for a piece of music. This system allows investors to collect a royalty stream alongside the artists making their favorite music.
• Cypress Growth Capital : Cypress Growth Capital is a solid royalty option to look at if you’re interested in business investing, technological innovations, small businesses, venture financing, and similar options.

Other online platform options, royalty trusts, and companies to look into if you’re exploring different ways of making money with royalty investment include Sabine Royalty Trust, BlackRock, KKR, Vox Royalty, and more. However, the above options may be the easiest to get the hang of for beginners.

Chances are you wouldn’t invest heavily in a particular stock without doing much research on it first. The same should be true of music investment and other opportunities to buy royalties.

For example, suppose you’re thinking about investing in a particular song that’s really been climbing the charts lately. Yes, you may hear the next big classic that people will be jamming out to for decades. However, songs can just as easily be red hot one minute, only to be completely forgotten the next.

Do your homework before putting your money down to better gauge the cash flow potential of your investment. Questions to ask yourself during this process might include:

• How solid is the artist’s fan base? Who listens to their music and why?
• What is the artist’s reputation like? Do they have a wide-reaching appeal, are they controversial, etc.?
• What are trusted experts saying about this artist, their music, and their future in the industry?

Again, don’t let the fact that you personally really love a song and want to believe in it distract you from the process of determining its true potential as a future royalty stream. Seasoned investors know how to set aside emotions in favor of smarter decision-making.

Whether you’re purchasing stock shares via public markets or exploring various royalty opportunities, never put all of your eggs in just one basket. Markets fluctuate, and risks come and go, so flexible portfolio development is key — especially if you’re investing as part of a plan to become independent financially.

Always aim to maintain a balanced portfolio overall. Spread your money around, and consider speaking to a financial advisor to better understand your ongoing options.

See Related: Build a Socially Responsible IRA

The more you invest, the more you’ll learn about the royalty market, and the more comfortable you’ll become chasing higher yields and pursuing new investments.

So, don’t simply sit on your current investments. Keep your royalty payments growing by researching new targets and reinvesting in solid options.

You should also keep an eye on old targets, as well, to better assess whether additional investment is a good idea. For example, if a decision to invest in a particular artist’s work or intellectual property turns out to be particularly smart, consider gradually putting more of your money into their catalog moving forward.

Keep educating yourself further on the royalty market, going royalty rates, interest rates, and other essential concepts, as well. The more you know, the better equipped you’ll be to make wise future investing decisions.

Still not sure whether pursuing royalty income is right for you? Here’s a closer look at some of the biggest reasons other investors make royalties part of their future financial plans.

Establishing and maintaining steady passive income streams is always a wise financial decision. However, not everyone can create something with the potential to produce royalties from the ground up themselves.

Choosing to pursue royalty investment allows you to leverage other people’s great ideas, hard work, and creativity to generate consistent income instead. It’s also a rewarding, interesting way to support work you believe in and participate in other industries that interest you.

Although all suitable investments will come attached to some ongoing returns, royalty investments are very high-yield, comparatively speaking. For example, investing in a solid music catalog can generate returns as high as 10 percent.

Oil company royalties, intellectual property royalties, and more also typically bring in reliably high returns on one’s original investment.

See Related: Best Investments for Low-Income Earners

If you’re a stock investor, you already understand how important diversification is for ongoing income stability. Not only would you not invest all of your money in one stock, but smart investors know to invest in a variety of stock types , as well — bonds, funds, ETFs, and more.

Learning to invest in royalty income and other alternative assets is a great way to keep building on your investment foundation. And the more you diversify, the better protected you’ll be against future potential market fluctuations, volatility, etc.

When well-researched and wisely chosen, royalties can be a very good investment. They generate steady income, yield high returns on initial investment, and are relatively stable as compared to stocks, bonds, and similar options.

Popular royalty options, including music and entertainment royalties, can be obtained via online marketplace exchanges. Options include (but are not limited to) Royalty Exchange, SongVest, and Royal.

Like other investment types, there’s always risk involved in royalty investing. Factors like valuation can be variable and change drastically over time. Plus, there is no guarantee that a particular investment will succeed.

Royalties attached to music continue for as long as the songwriter lives, plus another 70 years. This is how you can have songwriters who live off of a single big hit for the entirety of their lives and then some. Their children may even be able to do the same in certain cases.

All types of royalties — including those associated with natural resources, copyrights, and patents — are taxed as standard income. Therefore, all investors should expect to pay taxes on their earnings should they receive royalty income.

Related Resources

• How to Invest in Stocks: A Comprehensive Guide
• How to Invest in Community [Step-by-Step Guide]
• How To Invest In Infrastructure [Step-by-Step Guide]

Kyle Kroeger, esteemed Purdue University alum and accomplished finance professional, brings a decade of invaluable experience from diverse finance roles in both small and large firms. An astute investor himself, Kyle adeptly navigates the spheres of corporate and client-side finance, always guiding with a principal investor’s sharp acumen.

Hailing from a lineage of industrious Midwestern entrepreneurs and creatives, his business instincts are deeply ingrained. This background fuels his entrepreneurial spirit and underpins his commitment to responsible investment. As the Founder and Owner of The Impact Investor, Kyle fervently advocates for increased awareness of ethically invested funds, empowering individuals to make judicious investment decisions.

Striving to marry financial prudence with positive societal impact, Kyle imparts practical strategies for saving and investing, underlined by a robust ethos of conscientious capitalism. His ambition transcends personal gain, aiming instead to spark transformative global change through the power of responsible investment.

When not immersed in the world of finance, he’s continually captivated by the cultural richness of new cities, relishing the opportunity to learn from diverse societies. This passion for travel is eloquently documented on his site, ViaTravelers.com, where you can delve into his unique experiences via his author profile.

Table of Contents

What Is a Book Royalty?

What are typical rates for book royalties, how are book royalties calculated, what is an advance, example of book royalties with an advance.

• Amazon's Self-Publishing "Royalties"

Book Royalties 101: How They Work (Complete Guide)

You’ve probably heard the term “book royalty” get tossed around a lot in publishing.

But what does it really mean?

To put it simply: a book royalty is the amount that a publisher pays an Author for the rights to publish their book.

While simple in concept, this can bring up a host of other questions for first-time Authors:

• Do Authors start earning royalties right away?
• How much can you earn as an Author?
• What’s the typical profit margin on a nonfiction book?

Still, royalties don’t have to be a mystery. In fact, they’re pretty easy to figure out.

In this post, I’ll explain what royalties are, how much Authors can earn, and how you can calculate them.

A book royalty is the amount that a publisher pays an Author in exchange for the rights to publish their book.

Royalties are calculated as a percentage of book sales . For example, an author might earn 7.5% royalties on every paperback sold and 25% on every eBook sold.

Royalties are typical in traditional publishing , where Authors sell the rights to their book to a publisher. In self-publishing , royalties don’t exist because the Author sets the prices and decides on the profit margin.

Even though they’re a common way for Authors to make money, royalties don’t always work in an Author’s best interest. That’s because a royalty-based financial model forces publishers to focus entirely on book sales.

Authors have plenty of ways to make money , aside from selling their book. They can give talks, find new clients, consult, launch a product, become a coach, or build a personal brand. Of course, it’s great to have a book that sells a million copies, but that’s an extremely rare event.

For publishers, royalties are the only way to earn money. It doesn’t matter if an Author gives 50 talks a year to packed rooms of thousands. If those talks don’t translate to direct book sales , they have no value for a publisher.

It’s unfortunate, but the royalties model forces publishers into a short-sighted focus when it comes to Authors and the power of books. They only buy books that they think will sell in large numbers, and they have to market them to the largest audience possible.

In the long run, that narrow focus can be an obstacle for Authors who want to use their book to expand their personal brand or achieve other goals.

Royalty rates vary slightly, but on average, you can expect the following from traditional publishers:

• Hardcover sales: 15%
• Trade paperback sales: 7.5%
• Mass-market paperback sales: 5%
• eBook sales: 25%
• Audiobook sales: 25%

Some contracts include graduated royalties. For example, you might earn 10% on the first 5,000 hardcover copies sold, 12% on the next 5,000, and 15% on every copy thereafter.

Most publishers pay royalties based on the retail price of the book. That means if the book retails at $20, and the royalties rate is 5%, you will earn $1 per book sold. These kinds of royalties are often called “list royalties” or “retail royalties.”

Occasionally publishers pay Authors “royalties on net sales.” Publishers sell to book outlets at different prices. For example, a publisher might offer a large wholesale discount to Amazon and a lower discount to an independent bookstore that only buys a few copies.

Royalties on net sales are calculated after factoring in all those price differences and discounts.

It’s generally better for Authors to receive retail royalties since the list price is the highest price a book sells for.

At this point, book royalties might sound great. You’re making money on every sale, and $1 for every book adds up.

But here’s the tricky part: Authors don’t earn royalties right away. You only get them once you’ve earned out your advance.

An advance is a negotiable up-front payment that a publisher pays an Author.

You may have heard about million-dollar advances for hot-topic or in-demand books from major publishers.

Most advances are much more modest. There is no average advance, but six-figure advances are fairly rare outside of the large houses, and 5 figure advances are far more common. And there are even very small advances. Some academic presses might only offer $1,000 for an advance.

That discrepancy exists because an advance is based on the number of books a publisher thinks they can sell. Trendy topics from established authors can sell a lot of books, which means the Author gets a higher advance. Niche topics can sell only a limited amount of books, so there’s not as much money at stake.

There isn’t an average advance amount, but most major publishers don’t offer small ones. If they don’t think a book will sell well enough to earn back six figures, they usually won’t put the effort and resources into publishing it.

Advances aren’t charitable gifts. They are payments against future royalties. That means if a publisher gives you a $100,000 advance, they expect to make more than $100,000 off book sales.

Once an Author gets an advance, they won’t see another cent until their book has sold enough copies to pay the advance back.

In other words, if your book is earning royalties at a rate of $1 per copy, and you got a $100k advance, you’d have to sell more than 100,000 copies before you’d receive royalty payments.

Advances are great if you can get them, but they’re hard to get. Publishers want to know that a book is going to be a sure success before they give an Author an advance.

(Thankfully, if you don’t earn back your advance, the money is still yours to keep. But publishers might be wary of taking on your next book.)

Unless you already have thousands of followers on social media or a highly visible personal brand, it’s hard to break into the world of traditional publishing. Publishers don’t want to take risks, and most Authors don’t have the platform to guarantee 25,000 sales.

If you are lucky enough to score an advance, there are still trade-offs to consider.

You will no longer own the print license for your book, which means you can’t do anything else with the content. If you wanted to break it into smaller chunks and sell it on your website, you couldn’t. If you wanted to turn it into a magazine article, you’d have to get the publisher’s permission.

Then, if the book is a major hit, you’re only going to get a small fraction of the profits. Let’s say you earn back that $100k advance and sell another 200,000 copies. With royalties, you’d earn another $100k.

But if you had self-published that same book, you’d earn 100% on each sale after recouping your production costs . That’s a lot more than 5%.

Instead of $200,000, you could be making millions.

Let’s say you found an agent , wrote a book proposal , got an offer, accepted that offer from a traditional publishing house, negotiated a publishing contract, wrote the book , and the book is ready to launch . Here’s a deeper look at how your book royalties and advances would work.

Your $100,000 advance would likely be split into three payments. You’d get $33.3k when you sign the book contract, $33.3k when you deliver the manuscript and another $33.3k when the book is published.

Your retail royalties are 7.5%. The list price for your book is $20.

That means you’ll earn $1.50 in royalties per book.

Now, let’s say you mobilize your contacts for your book release, and in the first month, you sell 5,000 copies. Most big publishers want 25,000 sales in the first month, but very few books actually sell that well.

(For the record, 5,000 copies a phenomenal launch. In 2019, Scribe’s median title sold 174 copies in the first week. That’s a better target for the “average” nonfiction book. It may not sound like much, but that number creates enough momentum to keep spreading by word of mouth.)

That means in the first month your book earned $7,500 toward your advance.

You have $92,500 to go before you’ll get a royalty check.

If your book keeps selling at a steady pace, it will take you just over 12 months to earn out your advance. Afterward, any royalties are yours.

It’s really hard for a book to sustain its first-month sales for over a year. But let’s say you get some good press and miraculously, sales stay steady. If you continue to sell 5,000 copies every month, at the end of two years, you will have earned:

Your $100,000 advance + 7.5% royalties on another 53,333 books = $180,000

Amazon’s Self-Publishing “Royalties”

When you self-publish, you keep the rights to your works. That means, technically, Amazon’s payments aren’t really “royalties,” even though that’s what Kindle Direct Publishing (KDP) calls them.

You have two royalties options for KDP eBooks: 35% or 70%. The choice for higher royalties might seem obvious, but there are some stipulations involved, like pricing and geographical availability.

You also have the offer to enroll your book in the KDP Select program , which offers a different royalty structure. You can find out more about all those options in this post .

No matter which royalties plan you choose, here’s an important point: Authors on KDP keep complete control over their book’s price and promotions. You have the right to use the book however you want to.

At the end of the day, your book should be working for you, not the other way around. If you can get a large advance and already have a strong following, traditional publishing might be your best option.

But maybe not.

You have to decide whether the trade-offs are worth it.

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Brand rights: what type of taxable income royalties or business income.

The Tax Court recently decided a case,  Slaughter v. Comm’r (find all the citations in  1 Taxation of Intellectual Property § 1.06 (2019) , involving annual royalty payments to an author wherein the IRS argued that instead of treating the payments as royalties that are not subject to self-employment and Medicare tax, the payments should be treated as net earnings from self-employment. The dispute that the Tax Court faced was whether there is a distinctio n, for self-employment tax purposes, between an author’s royalty income derived from her writing and any royalty income derived from her name and likeness. The author contends that one portion of her royalty payments is derived from her writing, which is a trade or business, and that another portion is derived, not from her writing, but rather solely from her name and likeness which are personal attributes which are not part of any trade or business. The IRS argued that the entire payments the author received from her publishing contracts were derived from her trade or business as an author, thus subject to self-employment tax.

To provide context to the dispute, Karin Slaughter  is a bestselling crime author: over 35 million books sold in 37 languages. The Tax Court stated the following details of her publishing contract are standard in the publishing industry. Her contracting publishers receive more than just the right to print, publish, distribute, sell, and license the works and manuscripts written, or to be written. The publisher also secures the right to use the author’s name and likeness in advertising, promotion, and publicity for the contracted works. The author is required to provide photos and be available for promotional activities. The contracts include noncompete clauses that vary in scope, from requiring that the specified manuscript be completed before others, to prohibiting the author from entry into another contract until her writing obligations are met. Publishers also secure the right to advertise other works in the author’s books, qualified by the requirement that the author’s consent to the specific advertisements. Several of the contracts allow for, but do not require, a share of advertising proceeds to be paid to the author as a condition of her consent. Finally, the contracts include an exclusive option for the respective publisher to negotiate the contract for the author’s next works.

The author also receives more than just her advances and royalties. For instance, some contracts include a marketing guaranty requiring the publisher to spend a minimum amount on marketing for the author’s books. Although the publishers fund the marketing plan, the author’s agent retains the authority over its development. Another example is the author’s option to purchase the publisher’s plates at a reduced cost for any book that goes out of print and that the publisher refuses to reissue or license. In that instance, the rights in the work also revert to the author.

On her Federal income tax returns, the author deducted as a business expense the cost of leasing a vehicle to attend media interviews and promotional events. She also deducted the cost of hosting her own promotional events. For marketing purposes, many of her meetings were scheduled in New York City. While there, the author often attended meetings, conducted media interviews, and participated in publishing industry events such as trade shows. During the years in the issue she also met with a fellow writer to collaborate on a script for a possible television series. To facilitate her various activities, the petitioner rented an apartment in New York City and deducted the rent. Petitioner also deducted the cost of business gifts to agents, editors, publishers, and others.

The authors income grew eightfold due to her brand as an author. That brand is monetized by the author’s ability to attract and engage readers, speak in front of a crowd, and recommend other authors within her publishing house. Petitioner’s promotional activities and writing have created a very successful brand and body of work. In petitioner’s case, her brand includes her name and likeness as well as her reputation, goodwill, and existing readership. She maintains contact with her readership through social media, websites, and a newsletter.

The author’s advisors concluded that any amount paid to the author for the use of her name and likeness was “investment income,” i.e., payment for an intangible asset beyond that of her trade or business as an author. The author’s name is a brand.  The author’s expert concluded that the actual writing of a manuscript is but a small percentage of the value a publisher seeks from an author. An author’s work may sell on the basis of the author’s name and readers’ expectations for a particular kind of story, rather than for the quality of the writing. Thus, the author contended that the amount paid for her writing is what a publisher would pay a nonbrand author, and the residual amount is a separate and distinct payment for her brand.

The Tax Court held that the author’s brand became part of her trade or business. The Tax Court focused on the following elements of her behavior. The author was engaged in developing her brand with continuity and regularity. The author set out in a businesslike fashion to obtain stationery, a reputable agent, and a publishing contract. The author worked with a media coach and publishers to develop a successful brand. She has spent time meeting with publishers, agents, media contacts, and others to protect and further her status as a brand author. She attended interviews and promotional events and works to develop and maintain good relationships with booksellers and librarians. The author uses social media, websites, and a newsletter to maintain her brand with her readership. The Tax Court noted that royalties earned from her brand are not solely a result of her publishers’ actions.

The Tax Court then turned the fact that the author deducted advertising costs, the cost of a car used, in part, to attend promotional activities around Atlanta, and gifts sent to her contacts in the publishing world. Such expenses, stated the Tax Court, demonstrate that petitioner’s trade or business extends beyond writing to its promotion. If the author takes such promotion and brand-related expenditures on her Schedule C trade or business expenses, then the income derived from the brand to which those expenses relate must also be trade or business income. The Tax Court found on behalf of the IRS.

The Tax Court stated that there was not a particular case on point regarding an author’s income from the business of writing and that attaching to royalties for the sales of an author’s books. The Tax Court distinguished other cases decided in favor of the taxpayer regarding athletes and image rights, albeit these cases arguably are applicable to Karen Slaughter’s situation. For example, in  Garcia v. Comm’r , the issues were to what extent to which payments made to the taxpayer under the endorsement agreement were compensation for the performance of the taxpayer’s personal services and the extent to which the payments were royalties for the use of the taxpayer’s image rights. The Tax Court stated that

“ Courts have repeatedly characterized payments for the right to use a person’s name and likeness as royalties because the person has an ownership interest in the right .”

The Court therein cited  Goosen v. Comm’r  that the characterization of a taxpayer’s endorsement fees and bonuses depends on whether the sponsors primarily paid for the taxpayer’s services, for the use of the taxpayer’s name and likeness, or for both. The court held that the payments made by the company were allocated 65 percent to royalties and 35 percent to personal services.

In  Kramer v. Comm’r , the Tax Court found that royalties paid primarily for the grant of the exclusive right to use the taxpayer’s name to sell sports equipment, and only secondarily for the personal services rendered by taxpayer under the royalty contract. Herein the Tax Court concluded that commercial success for sales upon which the royalty income derives depended upon accompanying aggressive promotional activities. For Mr. Kramer, the Tax Court concluded that only the portion of the royalties that reflected compensation for the personal services constituted “earned income.” In  Boulez v. Comm’r ,  the Tax Court said if a taxpayer has an ownership interest in the property whose licensing or sale gives rise to the income, then that income should be characterized as a royalty as opposed to personal service income. Therein the Tax Court cited the Fifth Circuit decision of  Patterson v. Texas Co , wherein the Court of Appeals adopted the definition of a “royalty” as

“a share of the product or profit reserved by the owner for permitting another to use the property.”

The  Slaughter  case is ripe for appeal . The weight of jurisprudence perhaps rests on the author’s side regarding whether the royalties should be apportioned and that a portion derives from her brand rights that are not personal service income. Like for the tennis star Mr. Kramer, aggressive promotional activities are necessary to grow the sales of the product. There can be no brand, such as a trademark, without promotion of it. But the promotional activities are not the business of the author but rather those of the publishing company to sell books.

Yet, the weight of the facts perhaps rest on the side of the IRS. If the author’s accountants claimed the full amount of the expenses, such as for the New York apartment, on the author’s Schedule C as a trade or business expense, then correspondingly, as the Tax Court presents, income associated with those expenses is also Schedule C. It does not appear that the accountants undertook any diligence, by example not reading the contracts and not seeking any support records for the guestimate by the author of her time apportionment. It does not appear the accountants undertook any research and analysis other than to dismiss that any cases applied. It does not appear that the accountants undertook any planning research, or at least, the author rejected paying for such advice because it is common practice for authors, artists, and athletes of this income level to operate via a Sub S corporation or LLC. The pass-through business is a well-understood mechanism for mitigating Medicare tax, though with its own host of issues regarding compensation versus distributions.

Your comments are welcome. Written by William Byrnes .

William H. Byrnes has achieved authoritative prominence with more than 20 books, treatise chapters and book supplements, 1,000 media articles, and the monthly subscriber Tax Facts Intelligence. Titles include: Lexis® Guide to FATCA Compliance, Foreign Tax and Trade Briefs, Practical Guide to U.S. Transfer Pricing, and Money Laundering, Asset Forfeiture; Recovery, and Compliance (a Global Guide). He is a principal author of the Tax Facts series. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, and practiced in Southern Africa, Western Europe, South East Asia, the Indian sub-continent, and the Caribbean. He has been commissioned by a number of governments on tax policy. Obtained the title of tenured law professor in 2005 at St. Thomas in Miami, and in 2008 the level of Associate Dean at Thomas Jefferson. William Byrnes pioneered online legal education in 1995, thereafter creating the first online LL.M. offered by an ABA accredited law school (International Taxation and Financial Services graduate program).

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What is Royalty Income and How is it Reported? (function(d, s, id) { var js, fjs = d.getElementsByTagName(s)[0]; if (d.getElementById(id)) return; js = d.createElement(s); js.id = id; js.src = "//connect.facebook.net/en_US/sdk.js#xfbml=1&version=v2.8"; fjs.parentNode.insertBefore(js, fjs); }(document, 'script', 'facebook-jssdk'));

Royalty income is money you receive as payment for allowing someone to use your property or to derive income through the use of property you own. Royalty-generating property can take many different forms:

• Real estate
• Mineral rights
• Photographs, videos, drawings or illustrations
• Plays, books, songs, poems or articles
• Other types of real or intellectual property

Royalties are frequently generated through license agreements, copyrights, patents and oil, gas, or mineral leases. If you receive royalty income you will probably get one or more Form 1099-Misc in January or February of the tax year following the year in which you received the payment. The amount of the royalty payment will be shown in Box 2 of the form. You are responsible for reporting all income on your tax return and paying the appropriate tax on it even if you do not receive Form 1099 from the payer. 

How do I know where to report my royalty income?

Before you can report royalty payments you must determine whether you should report the money as business revenue or investment income. Any royalties you receive will be treated as investment income unless your primary business involves this type of activity.

If your job or business is unrelated to the source of the royalty payment, it’s probably investment income that should be reported on Schedule E, Supplemental Income and Loss. For example, if you purchase or inherit mineral rights and sign a lease to a company that wants to drill or prospect for oil, gas or other mineral resources, the money you receive should be treated as investment income unless your primary business is investing in mineral rights.

Self-employed taxpayers should compare royalty payments to their regular work to determine how to report this income. If the royalty income is unrelated to the work you usually perform as a self-employed taxpayer, you should report the payments on Schedule E . For example, a freelance software developer who sells the rights to a song they wrote can report any related royalty payments as investment income.

On the other hand, a musician who sells the rights to a song must treat any royalty income related to that song as business income. If your business owns or creates the property that generates the royalty payment (e.g., graphics your business created, copyrighted content or software licensed by you or your company for someone else to use), then the royalty income must be reported on Schedule C , Profit or Loss From Business. Your gross business revenue will increase by this amount and you must pay self-employment taxes on this income.

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Section 80QQB – Royalty Income – Deductions under 80QQB

Updated on : Apr 30th, 2024

What is Royalty?

When authors provide their books to publishers for publication, the publishers generate profits through book sales. As a form of compensation for the authors' content creation, the publishers agree to pay a portion of their profits or sales to the authors. This compensation, known as royalty, is the authors' remuneration for their work in writing the book.

The components included in royalty income are as follows:

1. Income earned by the author for practising their profession.

2. Lump sum payments received for writing projects that have copyrights for books, whether they are artistic, literary, or scientific in nature.

3. Copyright fees received for the author's book.

4. Non-refundable amounts received as advance payments for copyright fees or royalty.

Deduction for Royalty Income of Authors

Authors write books and give them to publishers. Publishers publish them and earn profit by selling those. They pay an agreed percentage of profit or sales made to the authors as a reward or compensation for writing books. This reward or compensation is called Royalty.

While the Income tax department charges tax on this income under “Profit and Gains of Business or Profession” or “Other Sources” head of Income, it also provides a deduction on the same that the authors can claim to save tax. This deduction is covered under 80QQB of the Income Tax Act,1961.

Amounts Included in Royalty Income

• Any income earned by an author for practising his profession
• Any income earned as a lump sum payment for assignment (or grant) of any of his interests in the copyright of any book based on literary, artistic or scientific in nature or of royalty or copyright fees for the author’s book
• Any income received as advance payment of royalties/ copyright fees (amount which is non-refundable)

Amount of Deduction

Deduction available will be lower of the following:

• Rs 3 lakhs or
• The amount of royalty income received

Exceptions for the deduction under section 80QQB

Under Section 80QQB of the Income Tax Act, royalties earned from journals, diaries, guides, newspapers, pamphlets, textbooks, or similar publications are not eligible for deductions.

In addition, any royalty income received from abroad must be repatriated and brought into the country within a specified time period in order to avail the benefits of deduction under Section 80QQB.

The benefit of the deduction under section 80QQB

Authors can avail of the benefit under Section 80QQB of the Income Tax Act. They can claim an income tax deduction, whichever is lower, between Rs 3 lakh and the actual amount received as royalty.

Conditions to avail the benefit of Sec 80QQB

a. Following are certain conditions to be satisfied for income earned in India and outside India

i)  Individual claiming the deduction must be a resident in India or resident but not ordinarily resident in India.

ii) Individual must have authored or co-authored a book that falls under the category of literary, artistic or scientific work.

iii) Individual must file his income tax return to claim the deduction.

iv) If an Individual has not received a lump sum amount , 15% of the value of the books sold during the year (before allowing any expenses) should be ignored.

v)  Individual must obtain FORM 10CCD  from the person responsible for making the payment.

vi) Individual must opt to file his Income Tax Return under the old regime .

Note: Books here doesn’t include Journals, guides, newspapers, textbooks for school students, pamphlets, dairies and other publications of similar nature.

b.  Additional requirement for Income Earned outside India

Individual is allowed deduction on income earned outside India when the income is brought to India in convertible foreign exchange within 6 months from the end of the year or within the period allotted by RBI or other competent authority for this purpose. Individual must obtain a certificate in FORM 10H .

 a)  Ms. Komal is very passionate about writing.  She is a resident of India and a recognized author who writes books on Literature and art work. She earns Rs. 550,000 as her royalty income and she has a business where her  profits are Rs. 200,000 p.a. Her net income will be as under :

b)  Mr. Ravi is a scientist and an author. He is a resident of India during the FY 2023-24 and earns income from writing books on scientific facts from a publisher based in UK . He earned Rs. 600,000 on 22nd April 2023 and received the foreign remittance after 6 months i.e 31st Oct 2023. His net income will be under :

As Mr. Ravi received foreign remittance after 6 months then he will not be eligible for any deduction under section 80QQB.  

Form 10CCD Format

To claim a deduction under section 80QQB, it is necessary for the taxpayer to acquire the prescribed Form 10CCD. The Form 10CCD should be duly filled and signed by the individual or entity responsible for making the royalty payment to the taxpayer. Utilizing the provided Form 10CCD format is advisable when seeking the deduction under this particular section.

Frequently Asked Questions

The authors get deductions for the income earned in the form of royalty by them for writing books.

Any payment received as compensation for writing books or copyright income for the publication is called a Royalty.

The deduction that is available under section 80QQB is Rs. 3 Lakh or the royalty amount received, whichever is less.

Yes, the income from royalty is taxable under the head Income from business and profession or other sources.

The following types of books are eligible for the deduction under Section 80QQB:

Literary, artistic, or scientific works in the form of books or any other publications that are not meant to promote any particular profession, business, or industry. Technical or professional books that are meant for professionals, such as engineers, doctors, lawyers, accountants, etc. Books approved by the National Book Trust of India or any other government-approved body.

No, the deduction under Section 80QQB is available only to individuals and not to HUFs, companies, or any other type of entity.

No, the deduction under Section 80QQB is not available for income earned from the sale of e-books or digital content.

Yes, if an author receives royalty income from a book jointly authored with another person, both authors can claim the deduction separately, subject to a maximum limit of Rs.3 lakh each.

No, the individuals who are writing in newspapers, pamphlets, guides, textbooks , diaries, or journals are not eligible to claim a deduction under section 80QQB.

No, an assessee cannot claim deduction under Section 80QQB if he files his ITR under the New regime.

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Personal Finance

How to start an online business in 8 steps.

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The internet has reshaped where, when, and how people shop for goods and services. The popularity of digital shopping has opened a world of opportunities for online business owners. With a computer and a stable internet connection, you can work from anywhere, set your own schedule, and sell to customers worldwide while avoiding the hassle and costs of owning a brick-and-mortar business.

Whether you're just starting to brainstorm about the best online business ideas or already have a concept in mind, here are some tips for getting your business up and running.

8 Ways to start your online business

1. establish a business niche.

If you haven't done so already, you'll need to decide what you want to offer and who your target customers will be. Here are a few factors to consider:

Your interests

Mark Twain once said, "Find a job you enjoy doing, and you will never have to work a day in your life." While only some would agree with this work/life approach, it's a good starting point for choosing a business niche. Think about your passions, skills, and expertise, then focus on ideas where they intersect.

Target audience

Consider your target audience and whether they have a problem no one else is solving or a product no one else is providing. If so, do they have the discretionary income to afford your product or service and are they willing to pay for it? Will there be adequate demand?

Profit potential

Consider if your niche has profit potential in an online environment. For example, an overly large or heavy product may be too expensive to ship at a reasonable cost. Is the idea scalable so you can accommodate more customers and transactions in the future?

2. Choose a business model

A business model is how your company will provide products or services to customers and make money. Some options to consider include:

• Affiliate marketing. Promote other businesses and receive a commission for each sale you make.
• Coaching and consulting. Share your expertise and offer guidance.
• E-commerce. Launch a website and sell products online using one of the best payment gateways .
• Franchising. Pay a franchise fee and operate under an established brand.
• Freelancing. Offer a service such as writing, programming, web design, or social media marketing.
• Information products. Create and sell eBooks or online courses.
• Subscriptions. Package software or subscription boxes and charge a recurring fee.

3. Write a business plan

A good business plan outlines the steps to start and manage your business. The important thing is to think through the key elements of your venture while focusing on your goals. According to the Small Business Administration (SBA), a traditional business plan format includes some combination of the following:

Executive summary

Explain what your company is and why it will be successful. This section should include your mission statement, product or service, basic company information, and financial details if you need financing.

Company description

Provide detailed information about your company: the problem it solves, your target audience, and your competitive advantages.

Market analysis

Explain your industry outlook, what other businesses are doing, and how you can do it better.

Organization and management

Outline who will run your company and how it will be structured. Will it be a general or limited partnership, a C or S corporation, limited liability company (LLC), or are you a sole proprietor?

Service or product line

Describe the product or service you offer, explaining how it benefits your target customers.

Marketing and sales

Explain how you will attract and retain customers and the steps for making a sale.

Funding request

Explain the level of funding you'll need over the next five years and how you'll use it. Include financial projections detailing your forecasted income, cash flow, and budgets. Research how to get a business loan , and familiarize yourself with the SBA website to learn more about its loan programs.

4. Develop your brand

Once you know what you'll sell and how you'll run the business, developing your brand is next. You'll have to choose a business name and create a logo. This process can be relatively simple if you already have ideas in mind—or challenging if you're starting from scratch. You might want to hire a graphic designer to implement your vision.

5. Create a website

Once you have developed your brand, it’s time to build a website. You’ll need to lock in a domain name and choose a hosting service. There are website builders, such as Squarespace , available to help you get started—or you can hire someone to do the work for you.

6. Cover legal bases

The next step is to make your business official. While the requirements vary by business, here are the essential action items:

Register your business

Registering with your state gives you legal grounds to use your brand's name. You can utilize a service like LegalZoom to register as a sole proprietor, LLC, corporation (C corp or S corp), nonprofit, or DBA (doing business as). Consult a tax specialist for help choosing the best business structure for your situation.

Apply for an EIN

You'll need an Employer Identification Number (EIN)—a federal tax ID—to pay federal taxes, apply for business licenses and permits, open a business bank account , and hire employees. You can apply for an EIN for free on the IRS website . The IRS says to beware of websites that charge for this free service.

Licenses and permits

Depending on your business activities and location, you may need licenses and permits from your state, county, or city. Check with your state's website (e.g., ca.gov, nc.gov) to determine your necessary licenses and permits.

Most businesses must file an annual income tax return, and the form you use depends on how your business is structured. Online services like Found, a banking and tax app designed for small business owners, have tools to make keeping track of taxes easier. It's also helpful to establish a relationship with a trusted tax specialist.

7. Market your business

Once your online business is ready for the world, it's time to market it. While marketing strategies vary depending on your business model and target audience, here are a few options to consider:

• Include your brand in online directories.
• Create social media profiles and share high-quality content often.
• Launch compelling email marketing campaigns.
• Use SEO best practices to optimize your site for search engines.
• Collaborate with influencers to promote your brand.
• Leverage your network—including professional contacts, friends, and family.

8. Reward customer loyalty

Keeping existing customers happy is often easier than generating new leads, so it can be worth the extra effort to reward them for their loyalty. Consider offering discounts to repeat customers or perks to patrons who refer friends and family. You might also provide spending-based rewards or incentives for sharing positive reviews on social media.

Of course, one of the best ways to reward loyalty is to connect with your customers personally, making sure they always feel welcome and appreciated. That way, they'll be more likely to become repeat customers, recommend you to friends and family, and help you grow a thriving online business.

Why should you consider starting an online business?

Consumers increasingly prefer shopping online, providing virtually unlimited opportunities for digital entrepreneurs to reach a global audience. Further, many of the traditionally time-consuming aspects of starting a business have been simplified—and made more affordable—by websites such as LegalZoom .

One outcome of the pandemic was the emergence of new and enhanced tools that make remote work not only possible, but more efficient. As a result, it's easier than ever to work anywhere in the world with a laptop and a reliable internet connection.

How to save when starting an online business

Businesses have a slew of start-up costs that can be difficult to manage before you're up and running. Here are a few ways to make balancing the budget a little easier.

Rewards credit cards

A business credit card is an excellent way to keep your business and personal expenses separate for accounting purposes, but that's not the only perk. With the best small business credit cards , you can also earn rewards on your spending, enjoy perks like free travel insurance, and score a hefty welcome bonus.

Tax prep software

A good way to save money in the early days of your business is to use upgradable tax prep and other business-related software. Start with the free version, then upgrade to the premium package once your business takes off.

Payment processing

You'll need a payment service provider to accept online payments. Not surprisingly, some payment solutions are more expensive than others. For example, Square charges 2.9% + $0.30 for online transactions, while Venmo costs 1.9% + $0.10 between Venmo accounts. Of course, fees shouldn't be the only consideration when choosing a payment service provider. Still, they're worth paying attention to; even small differences can add up over time.

TIME Stamp: Research and strategy are key to success

Starting an online business involves many of the same steps as opening a brick-and-mortar business. You’ll need to determine your niche, conduct market research, craft a well-thought-out business plan, and develop a brand and website. Implementing a successful marketing plan is also key to building and retaining a solid customer base.

Frequently asked questions (FAQs)

What is the best type of online business to start.

The best online business for you depends on your professional background, skills, interests, and goals. Think about what you're good at and enjoy doing, then brainstorm ideas for monetizing it.

Which kind of online business is most profitable?

There are a wide variety of online businesses ranging from e-commerce to private tutoring. How profitable one is over the other depends on a number of factors. The start-up and ongoing costs of some are nominal compared to others. For example, an online tutoring business would typically have much lower costs than selling collectibles online. Demand, competition, and how well an online business is managed also impact profitability.

Can I start an online business with $100?

You can start an online business on a shoestring budget. With $100, you’ll be able to buy a domain name, build a basic website (using a free template), and publish the site through a web hosting provider long enough to get you started. Of course, some ventures have higher start-up costs, so you may well need considerably more than $100, depending on your business.

The information presented here is created independently from the TIME editorial staff. To learn more, see our About page.

RFK Jr.'s family trust earns thousands from an oil and gas company

R obert F. Kennedy Jr., who built his public profile as an environmental activist and crusader against polluters, earned tens of thousands of dollars from an oil and gas rights leasing company.

The independent presidential candidate reported the earnings on his financial disclosure form filed last June from Arctic Royalty Limited Partnership, which leases land for oil and gas extraction in Oklahoma, Texas and other states.

Arctic Royalty, which is part of a portfolio of investments from Kennedy’s family trust accounts, leases land to multiple companies that have been fined for pollution and regulatory infractions, as well as to the chemical subsidiary of the company that polluted East Palestine, Ohio, in the trail derailment last year.

Kennedy earned between $17,759 and $29,257 from Jan. 1, 2022, to June 30, 2023, from Arctic Royalty — which is a significant portion of the possible earnings from his three family trust accounts. Those accounts produced an income between about $36,000 and $97,000, according to Kennedy's form. Arctic Royalty has been registered as a business entity in numerous states since 1985.

Overall, however, his Arctic Royalty earnings are a relatively small fraction of his overall income, which he reported at about $9 million.

When POLITICO asked about his earnings, Kennedy said he sold most of his stake in Arctic Royalty last December after his candidate financial disclosure form became public. He did not share documentation confirming the sale.

“I sold all my stake in this company in December. I still indirectly own a very small interest in Arctic Royalty through my brother David's estate. It generates approximately $1,000 per year. I own 1/10 of that estate. Because other family members are also owners, I have no power to sell off this investment,” he said in a statement.

On the campaign trail, Kennedy has centered his career as an environmental activist and anti-pollution litigator. He also criticized the Biden administration’s handling of the East Palestine cleanup in a campaign video, saying if he was president that "everybody involved, the corporate officials and the regulatory officials, would be held accountable, both criminally and civilly."

As a candidate, Kennedy pledged to ban fracking last fall as part of a 10-point plan to “fix” plastics pollution. But four days later, he walked it back. The campaign said he wouldn’t ban fracking because that would harm the U.S. economy but instead would support “a gradual phase-out of the practice, starting with the removal of subsidies and a moratorium on new exploration,” in a statement to Fox News.

“Arctic Royalty was a legacy investment that my grandfather Joseph Kennedy made in the early 1950s. The stock is held by a Kennedy family partnership in which I inherited a small stake due to its inclusion in my grandfather’s 1957 trust instrument. The company does not do any drilling. It owns mineral rights and pays out royalties from companies that are exploiting oil reserves,” Kennedy said.

The Office of Government Ethics requires that candidates who own oil and gas companies specifically disclose the names of the companies leasing the land and its locations.

Kennedy, however, did not detail the companies that lease land for oil and gas procurement from Arctic Royalty in his financial disclosures. But his cousin, Caroline Kennedy, who filed the same report to become ambassador to Australia, did.

The complete and transparent disclosure of a candidate’s financial investments and holdings is a vital part of the public vetting process, experts say.

“It’s really important for candidates to disclose their financial interests to voters because voters are deciding whether to entrust these people with an incredible amount of power,” said Delaney Marsco, senior legal counsel for ethics at the Campaign Legal Center. “The public has a right to know that these people are going to be acting in the public’s best interest and not in the interest of someone who used to pay them a lot of money to drill on their land, or used to pay their salary, or be a client of theirs.”

The OGE guidelines have specific rules for oil and gas rights leasing companies, which say that Robert Kennedy should have included in his own disclosure a similar list breaking down the companies that leased land from Arctic Royalty LP.

“You would expect to see it reported in the way that the ambassador reports it just based on what OGE guidance says,” Marsco said. “Not to say that it was an intentional omission, that you know, he was trying to hide something because clearly, it'd be very hard to hide it because it literally exists exactly in somebody else's report.”

Caroline Kennedy’s disclosure, which was also filed in 2023, reported that Arctic Royalty works with fossil fuel companies that have been fined for polluting by the EPA , Justice Department and state regulatory bodies as well as at least one other company that was served a notice of a potential violation .

Arctic Royalty also leases land to a subsidiary of Occidental Petroleum Corp., according to the latest available county appraisal property filings in Yoakum County, Texas . The chemical arm of Occidental Petroleum was transporting its products on the train that derailed in East Palestine, Ohio.

The chemical subsidiary is also a member organization of a lobbying group that weighed in on the Railway Safety Act of 2023 , introduced by Sens. Sherrod Brown (D-Ohio) and J.D. Vance (R-Ohio), which did not become law.

And the Occidental Chemical Corporation president is on the board of another lobbying group that argued against the Railway Safety Act. The American Fuel and Petrochemical Manufacturers wrote in a letter to Senate leaders that while it agreed with the “legislative intent,” it opposed reforms not directly related to the cause of that specific train derailment. This included opposing an accelerated phase-out of the tank car fleet.

Occidental Petroleum also reported lobbying the government on a variety of issues, including rail safety, rail customer service, tank car safety and oil vessels, according to public lobbying reports from 2023 .

Occidental did not respond to a request for comment. Kennedy said he could not find records of Arctic Royalty leasing land to Occidental, but the county records available online show a relationship dating back to 2013. Arctic Royalty could not be reached for comment.

Kennedy has used the East Palestine train derailment to highlight his background as an environmental activist who has a record of legally holding polluters accountable. He’s also used it to draw a contrast between himself and President Joe Biden, including making a campaign video that explains how his response would differ if he was in office now.

Kennedy did not mention in the campaign video about East Palestine that he received revenue from Arctic Royalty, which does business with the Occidental Petroleum’s subsidiary.

Kennedy, who was a professor and supervising attorney at Pace University School of Law's Environmental Litigation Clinic, often talks about the negative impacts of pollution in interviews and at campaign rallies, typically framing pollution as a market externality for which companies should be held financially responsible. He has a long history of making this argument.

“What polluters do is they make themselves rich by making everybody else poor. They raise standards of living for themselves by lowering the quality of life for everybody else. And they do that by escaping the discipline of the free market,” Kennedy said at a climate forum in 2011. “You show me a polluter, I’ll show you a subsidy.”

Kennedy was also a senior attorney at the Natural Resources Defense Council and was in leadership roles at both Waterkeeper Alliance and Riverkeeper, two nonprofits focused on suing polluters, at the time he made that comment.

His dedication to the environment and nature is not only core to his brand as a candidate but has also been deployed in campaign fundraising. Earlier this year, Kennedy auctioned off the chance to go on a falconry trip with him and a whale watching trip in Hawaii with him and his wife, actress Cheryl Hines.

Waterkeeper Alliance communications director Lori Harrison said Waterkeeper would not comment on Kennedy and declined to answer questions about whether the organization knew the oil and gas leasing company was part of his family trust while he worked there.

Kennedy reported receiving income from a benefit plan from NRDC on his candidate financial disclosure. The organization did not respond to a question about the oil and gas leasing company, but confirmed Kennedy draws a pension.

“Sound science is foundational to NRDC’s work to protect the environment and public health. Mr. Kennedy has not worked here since 2015, though he does draw a pension from his time as an employee,” said NRDC national media director Josh Mogerman in a statement.

The NRDC Action Fund, an affiliated 501(c)(4) organization, has endorsed Biden in the 2024 election.

Minnesota is heavy on corporate royalty, with several dividend aristocrats and even some kings

Although 3m cut its dividend this spring for the first time in 64 years, the list added fastenal this year, keeping minnesota companies front and center for the distinction..

By Patrick Kennedy Star Tribune

3M ended an era this spring when it cut its dividend — and Minnesota lost a king.

The move might seem intuitive because when the industrial giant split off its health care unit, it became a smaller company. But it came with fanfare, as news about royalty often does.

Dividend investing comes in and out of favor and can get overlooked especially in a era when fast-growth technology stocks have dominated the market. But regular paybacks to shareholders still holds sway on Wall Street. While it's certainly not the only signal, traditionally, the practice is seen as a sign of a mature, steady company.

That's why it's a big deal that eight of the Star Tribune 50 public companies are members of the elite S&P 500 Dividend Aristocrats Index. In another highly regarded index of corporate hard-hitters, Minnesota-run companies are represented above the state's weight — another sign of the region's entrenched corporate culture.

While the number of public companies in Minnesota has declined over the past year from 77 to 73, Minnesota still has 17 companies in the S&P 500 Index; 38 companies on this year's Star Tribune 50 list of the largest Minnesota-run public companies have revenue of $1 billion or more. Overall, revenue for the companies on the list rose 5.6% to $795.9 billion.

Among Minnesota's representatives on S&P's aristocrat index is the list's newest member: Fastenal, which surpassed the 25-year mark of raising its annual dividend in January. It took the place of Walgreens Boots Alliance, which cut its dividend 48% in January after 47 consecutive yearly increases.

3M, which had until this spring raised its dividend for 64 straight years, had become a king after it surpassed the 50-year mark. As of April 30 3M remained in the index despite the slide in status.

Now, the longest dividend streak in Minnesota belongs to Hormel Foods at 58 years of annual dividend increases. Target also is a dividend king, as are H.B. Fuller and Tennant, although those two are too small to make it on the S&P index.

Dividends have long been part of the decision on which stock to hold. But they have received less attention as high-growth tech stocks eschewed dividends for share buybacks and other strategies to boost share price.

The growing popularity of 401(k) plans in lieu of pension plans also meant less visibility to dividend payments. When it's a simple option to have dividends reinvested into your 401(k) plan funds, you're not likely to see benefits of dividends and distributions from those plans until retirement age.

Dividends are getting a fresh look after Facebook parent Meta and Google parent Alphabet announced their first quarterly dividends. The fast-growth tech giants up until now had not paid a regular dividend and instead preferred strategies such as buybacks.

Dividend investing strategies and dividend mutual funds are generally more conservative and provide shareholders a bit of extra security in times when the stock markets are more volatile. Mike Barclay is a senior portfolio manager for Ameriprise's Columbia Dividend Income Fund , which holds a five-star rating by Morningstar.

Barclay points out dividend status alone does not guarantee success or make it a good investment. Barclay and the other portfolio managers on the fund constantly look to "qualify the dividend." Over the life of the dividend fund Barclay manages, its holdings typically get about 75% of a down market's losses but 88% to 89% of an up market's gains.

"That's a pretty nice formula over time," he said.

Fastenal, a supplier of industrial tools, supplies and fasteners, did not manage its business to become dividend royalty, it is a byproduct of business strategy, financial success and the nature of its business.

"I think the importance of achieving dividend aristocrat status really is a reflection of a business model that can exhibit a tremendous amount of operational consistency and consistent cash generation that allows us to continue to raise the dividend at a decent clip every year — without jeopardizing the financial health of the business," said Holden Lewis, chief financial officer of Fastenal, which ranks 14th on this year's Star Tribune 50.

Dividends are just one part of a company's asset-allocation strategy. Fastenal has also used its free cash flow for share repurchases and to reinvest in the company including new sales locations and e-commerce capabilities each of which depends on cash flows.

"We have always taken a philosophy that we are a business that generates good cash flow, whether the business cycle is favorable or unfavorable, we traditionally generate good cash flow," he said.

In the end, that was the same reason why Walgreens cut its quarterly dividend. It had to strengthen its long-term balance sheet and cash position, CEO Tim Wentworth said at the time.

3M's stock price has been stagnant for five years and it faces billions in lawsuit settlements over earplugs and PFAS chemicals. The company, which ranks fourth on Star Tribune 50, recently spun out the healthcare business Solventum. In May, when the dividend was cut, it was not a surprise.

3M's new quarterly dividend is 70 cents a share , compared to the previous dividend of $1.51 a share.

Minnesota's largest public company, UnitedHealth Group, has been paying a consistent quarterly dividend only since 2010. It's included in a lot of dividend investing strategies because it increases its annual dividend at a healthy rate.

St. Paul-based Ecolab, has a similar philosophy as Fastenal that is baked into the century-old company's culture and values, said CEO Christophe Beck.

First, it focuses on growing the company organically and through M&A, then reducing corporate debt, regular stock buybacks to increase share price and then dividends to award shareholders.

"For us what's most important is to respect our word to our shareholders, to our customers, to our employees and to our communities," Beck said. "For me, it's a matter of commitment, of honor, that people can trust us that we will do what's right, the right way for them and for our future."

Business reporter Patrick Kennedy covers executive compensation and public companies. He has reported on the Minnesota business community for more than 20 years.

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