Royalties – Definition, Payment Processing and Tax Reporting

ROYALTY DEFINITION

The Internal Revenue Service (IRS) defines a royalty as something paid to obtain intellectual property, or to use intellectual property or rights to such property.  See reporting instructions at Instructions for Form 1099-MISC, Miscellaneous Income.

UW-Madison recognizes that the publishing industry may separate the operational aspect of the following transactions; however, the IRS classifies the following expenditure terms similarly:

  • Copyrights
  • Intellectual
  • Licensing
  • Patents
  • Permissions
  • Rights
  • Royalty
  • Trade Names
  • Trademarks

Note:    If the intent of purchasing images or items is to use them exclusively for teaching or research purposes only at the UW, the purchase does not have to be treated as a royalty even if permission to publish is effectively bundled with the cost of acquiring the images by the vendor.  Faculty researchers who want to reserve the right to publish images should not purchase them with this method. If the image will be used for research or teaching, use Account Code 3101 (Supplies-Office).  Purchases for teaching or research purposes only can be made with the P-card and may be bundled on one invoice (all of the images acquired from a single vendor may be handled in one transaction).  If the images are intended to be used for publishing at any point in time, follow payment processing instructions below to ensure proper tax compliance reporting.

ROYALTY PAYMENT PROCESSING

For U.S. Citizens and Permanent Residents:

  1. Use a UW payment request form and supporting documentation (PIR, DP, P.O., etc.).
  2. Use of the procurement card (Pcard) or payment by personal funds, with the expectation of being reimbursed by the UW, is prohibited due to documentation and approval requirements associated with rights related purchases per applicable Purchasing Policy and Procedures.
  3. An invoice or other supporting documentation should be provided with the payment request form (PIR, DP, P.O., etc.).
  4. The payment request form and supporting documentation (PIR, DP, P.O., etc.) funding string should use Account Code 3860 (Royalties).
  5. A completed and signed IRS Form W-9 should be attached to the payment request form and supporting documentation (PIR, DP, P.O., etc.).

    Note:    Transactions for permissions to publish must be paid with a UW payment request form and supporting documentation (PIR, DP, P.O., etc.), but can be bundled on one invoice so that all of the permissions acquired from a single vendor may be handled in one transaction.

For Nonresident Aliens (NRA):

  1. Use a UW payment request form and supporting documentation (PIR, DP, P.O., etc.).  Use of the procurement card (Pcard) or payment by personal funds, with the expectation of being reimbursed by the UW, is not allowed due to documentation and approval requirements associated with rights related purchases per applicable Purchasing Policy and Procedures.
  2. An invoice or other supporting documentation should be provided with the payment request form and supporting documentation (PIR, DP, P.O., etc.).
  3. The payment request form and supporting documentation (PIR, DP, P.O., etc.) funding string should use Account Code 3860 (Royalties).
  4. Federal tax must be withheld at the rate of 30% of gross royalties unless an IRS tax treaty is applicable.  See IRS Tax Treaty Table 1 (Royalties).
  5. See Tax Compliance and Reporting under the section on Nonresident Aliens (NRA) for complete restrictions and required documentation necessary when making a payment to any NRA.

    Note:    If expedited payment processing is required, contact your school’s Business Dean’s Office for Rush or Emergency Transaction processing.  Advanced planning for the purchase of rights is strongly encouraged as the publishing process may require additional time to complete all protocols and may involve transactions with domestic or international third parties.

ROYALTY TAX REPORTING

Royalty payments are tax reportable and are reported according to the IRS instructions on the IRS Form 1099-MISC, Miscellaneous Income.  See reporting instructions at Instructions for Form 1099-MISC, Miscellaneous Income.