What is the correct information reporting for royalty payments made by a publisher for the rights to an author’s book or other literary composition if such royalties are: (1) paid directly to the author or (2) paid to the author’s literary agent who then forwards all or part of such payments to the author?
First, the required reporting form to be sent to the author is Form 1099-MISC in any calendar year that the royalties aggregate $10 or more [Internal Revenue Code § 6050N(a) (relating to royalties)]. The royalties are reported on Schedule C in the income section by the self-employed author.
#1 Royalties Paid Directly from Publisher to Author
This is a straightforward process. The publisher will send the author Form 1099-MISC when the royalties paid to the author aggregate $10 or more during a calendar year no later than January 31st of the following year (example: 2013 royalty payments are required to be reported to the author (and the IRS) no later than January 31, 2014). The amount reported to you should be the gross royalties for the year. If the publisher took out any fees or expense amounts before paying you during the year, I will explain how to handle that below.
#2 Royalties Paid Directly from Publisher to Literary Agent and then from Literary Agent to Author
In this scenario, both the publisher and the literary agent are considered “payors” of royalties for purposes of Internal Revenue Code § 6050N. As such, the publisher must file Form 1099-MISC, reporting payments of royalties to the literary agent (named as the “recipient” on the form). One special exception: if the literary agent is a corporation, the publisher is not required to complete and file Form 1099-MISC on the payments made to the literary agent.
Most mistakes are made here…
The literary agent (whether a corporation or not) must file a Form 1099-MISC for the royalties paid to the author regardless of whether the literary agent receives a Form 1099-MISC from the publisher. The instructions to Form 1099-MISC provide that gross royalties (before reductions for fees, commissions, or expenses) paid by a publisher directly to an author or literary agent or paid by a literary agent to an author must be reported on Form 1099-MISC. Thus, although the literary agent may have subtracted commissions and expenses before making the payment(s) to the author, the Form 1099-MISC required to be filed by the literary agent must report the gross amount of royalties received from the publisher pursuant to Internal Revenue Code § 6050N for each specific client-author.
Personal experience notes…
Based on my experience, I am aware that some agents are either not filing Form 1099-MISC at all or they are reporting royalties to their authors on an after-commission/expense basis. This puts their client, the author, in jeopardy.
What can you do as an author?
If you don’t receive a Form 1099-MISC from your agent by January 31st, request one before you file your tax return. If you receive a Form 1099-MISC with any amount other than the gross royalties paid to you during the calendar year, request a “corrected” Form 1099-MISC be issued to you (with a corrected copy also sent to the IRS).
Properly Reporting Royalties on your Tax Return
Once you receive your Form 1099-MISC with the gross royalties paid from the publisher on it (either from your publisher or your agent), you will report that amount on Schedule C as part of your gross receipts or sales in the income section of that form.
At this point, you are thinking, why do I have to report my gross royalties even though I received a different amount of money after agent commissions or other expenses were deducted? That is a very appropriate question.
In order for you to pay tax only on the amount you actually received, you will enter the related expenses such as the agent’s commissions in the expense section of your Schedule C (for example: Agent’s commissions and fees would be a deduction in Part 2-Expenses of Schedule C on line 10). Any other deductions taken from your royalties before you received the net payment would also be deductible on the appropriate Schedule C expense line. This will ensure that you have reported your gross royalties, as required, but you have also deducted the expenses related to that income. When you do this correctly, your business net income will include only the amount you actually received during the year.