Many nonresidents who come to the US are unsure about various different aspects of taxation.
One of the areas that can prove troublesome is the taxation of royalties.
Many nonresidents are unsure how their royalty income will be taxed, and this can lead to a stressful situation come tax season.
Bearing that in mind, we have put together this article that outlines all you need to know about royalties and tax in the US.
What are royalties?
A royalty is a payment made from one party to another for use of their asset.
It is the name given to any income that is derived from the use of the payee’s property.
A royalty payment must relate to the use of a valuable right. According to the IRS, tax must be withheld on the payment of royalties from sources in the US.
However, some royalties may be given reduced rates or exemptions under some tax treaties, depending on whether or not your home country has a tax agreement with the US.
Royalties are generally paid to workers in certain sectors including: sportspeople, artists, musicians and actors.
How does the IRS define royalties?
A royalty is defined as: “Income derived from the use of the taxpayer’s property. A royalty payment must relate to the use of a valuable right owned by an individual or entity. Valuable rights may be the right to use intellectual property, trade marks, copyrights, or the right to use real estate property or natural resources.”
How do royalties work?
Royalties can either be paid as a fixed fee for the gross revenue derived from an asset, or as a fixed price per unit sold of an item.
The royalty percentage will be agreed by both parties within a contract.
However, there are also other metrics of this type of compensation.
A royalty interest is the right to collect a stream of future royalty payments.
Types of royalties
There are many different types of royalties mainly related to the type of right or to the type of the property it is. Here are a few examples:
Literary or scientific royalties: These are paid by publishers directly to authors. In this case, the usual agreement is that for every book sold, the author gets a percentage of the sale.
Broadcast royalties: Here, the owner of music that is copyrighted will receive a fee every time it is played on a radio station.
Musicians usually have to rely on a private performing rights organization, such as ASCAP or BMI, to collect the royalties for them.
Film and TV royalties: Similar to other royalties, the owner of a copyrighted film will be paid every time it is, for example, streamed on a platform like Netflix.
Do I have to report royalty income?
Yes.
You will have to report royalty income when you are filing your taxes at the end of the tax year. It’s the law!
Failing to report any income can land you in trouble with the tax authorities and have negative impacts when you are trying to apply for future visas or Green Cards.
Any royalty income will need to be reported on a Form 1042-S by the payer of the royalty.
How are royalties taxed in the US?
Any US-sourced Royalty payments that are given to nonresidents will be subject to 30% Federal Tax withholding (unless exempted or reduced under a Tax Treaty).
As a nonresident, you will have to report US-sourced royalty payments at the end of the tax year (15 April) on Form 1040NR.
Therefore, if you earn $10,000 of royalties, you will be taxed $3,000 unless you are exempt or taxed at a reduced tax rate under a tax treaty.
You should always find out whether your home country has a tax treaty with the US. Check out our blog that outlines all the countries that have tax treaties with the US!
Royalty payments by payee’s nationality
UK
The UK and the US have a tax treaty. As such, royalties that are received by a resident of the UK are exempt from tax by the US.
China
If you are deemed a resident of one US state and receive royalty payments from another state you will be taxed in the contracting state.
However, the tax will not exceed 10% of the gross amount of the royalties you receive.
India
US-India tax treaty grants a 15% tax rate for US-sourced royalty income.
Russia
US-Russia tax treaty covers copyrights on publishing, music, books, etc.
The rest of the royalties are taxable (for example industrial royalties or movie pictures rights).
There are a number of countries that do not have tax treaties with the US. That means you will not be entitled to a reduced rate of tax on your Royalty payments.
Countries on this list include but are not exclusive to: Argentina, Algeria, Albania, Andorra, Bosnia, Brazil, Chile, Croatia, Iran, Jordan, Macedonia, Serbia, and Uruguay.
How do I report royalty income on my nonresident tax return?
If the royalties are covered by a tax treaty, you must file a form W-8BEN to avail of this in advance of the payment (You can generate form W-8BEN with Sprintax Forms here).
As well as this, at the end of the tax year, this income will be reported on 1042-S form by the payer of the royalty.
You will need to include it on your 1040NR. Royalties are reportable on Schedule 1040NR-NEC attached to 1040-NR.
You can prepare your 1040NR tax return with Sprintax Returns
Can I claim my royalty tax back?
Put simply, that depends!
While you can claim a refund on your tax payments, you can only do so if you are entitled to a reduced rate, as per a tax treaty.
If the royalty payment has already been taxed correctly, you can not claim a refund.
How can Sprintax help me?
Put simply, Sprintax will help you with your tax obligations!
To avail of a tax treaty in advance of the royalty payment, you must provide W-8BEN form to the payer. You can fill out form W-8BEN with Sprintax Forms here.
If you are a nonresident alien in the US, our tax preparation software will ensure that your income is properly declared, meaning you won’t end up paying any more income than you need to.
As well as this, if you are due tax back, we will secure your maximum available refund!
Confused about any aspect of your tax obligations? No problem! We also offer 24/7 Live Chat.
If you have any questions about your tax situation, feel free to reach out to our team at any time.
Sprintax Returns can help you claim your tax payments back if you are due a refund!
