Singing Loudly

First, excuse me if my income tax law is a little rusty. It has been a year since I took the basic Federal Income Taxation course. Although I did well, I don't think that I have a brilliant understanding of the nuances.

One of my friends in the publishing industry told me that the way the IRS handles taxation of royalties has recently changed. Curiousity got to me, so I decided to figure out what is going on in the tax code.

First, there needs to be a basic understanding of the relationship between publisher and author to understand how the they are treated by the IRS. Authors have to pay income tax on the royalties they receive, of course. In some cases, authors are "employees" of their publishers, and so receive W-2 Forms from their publishers at tax time, just like other kinds of workers. Usually, however, authors are not "employees"; they are instead "independent contractors," so publishers send them 1099-MISC Forms, rather than W-2's. Publishers also send copies of these forms directly to the Internal Revenue Service, so the IRS will know what amounts to look for on authors' income tax returns.

None of that is new information, but the IRS released a Revenue Ruling that explains this and more. The ruling has a bland name ("Section 6050N. - Returns Regarding Payments of Royalties") despite it's interesting interpretation of the code.

The reason the IRS issued this new ruling is that publishers often pay royalties to literary agents, rather than directly to authors; and literary agents often deduct their commissions and expenses, before sending the rest to authors. Someone apparently asked whether - in cases like those - publishers still must send 1099 Forms to anyone, and whether literary agents should report the full (or in tax language, the "gross") amount paid by publishers, or only the net amount forwarded by agents to their author clients.

For publishers, the answer is "yes" - they must send (and file) 1099 Forms, even for authors whose royalties are sent to literary agents (rather than to the authors themselves). The new Revenue Ruling, however, advises publishers that if royalties are sent to literary agents, the 1099-MISC Forms should be sent to literary agents too, reporting the literary agent as the recipient - unless the literary agent is a corporation. A separate section of the tax law provides that 1099's do not have to be sent or filed for payments (of any kind) made to corporations.

For literary agents, the answers are "yes" and "gross." That is, literary agents who receive and then forward royalties for their author clients must send them (and file) 1099-MISC Forms, reporting the full amount of the royalties received from publishers, not simply the net amount forwarded to their clients.

Link to the Revenue Ruling in question (Acrobat Reader req'd).