a woman computing her taxesReporting royalties on individual tax forms for music artists, such as writers and performers, could be challenging because there are different royalty types that fall under different tax categories. Take, for instance, advance royalty payments.

Advance Royalties and Tax

A majority of individual taxpayers use the cash method for determining income, meaning that specific income is taxed in the year the money is obtained and not when it was earned. This particular distinction is crucial when figuring out and accounting advance royalties.

Normally, publishers advance royalty payments to music artists even before the creation of a song. The publisher could only recoup the advance once they publish the song and starts generating income. The music artist would then get more royalties depending on how the song performed.

How much is the advance royalty?

The amount would depend on different factors — how big the publisher is, the typical performance of comparable songs, as well as the track record of the music artist, etc.

If the music artist is obliged to pay back the publisher because of the song’s poor performance, the artist could deduct this the year they paid back the publisher. While this is generally fine for both parties, a potential issue could arise (not being able to deduct the repayment) for the artist if they obtain advance royalties, as the year is ending and would have to pay back some of it at the start of the next year.

While advance payments are usually called advance royalties, the Internal Revenue Service (IRS) doesn’t consider them as royalties, but compensation or payment for services rendered. This means that the music artist has to report the advance royalties as business or trade income.

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Figuring out taxes for royalties could be confusing and intimidating, especially if you don’t have any idea of what you’re doing, and this is especially true for advance royalties. If you’re a music artist, you have to be aware of these things. To that end, consider getting professional help sorting out taxes and accounting your royalties to avoid unfavorable consequences.