The Bureau of Internal Revenue taxes income received from royalties a bit differently than other types of income are taxed. Because of this, if your business collects royalties, you need to know how they’re taxed, but you also need to ensure that you don’t accidentally confuse royalties with service fees.
What Are Royalties?
Basically, a royalty is a payment for the use of proprietary information. For instance, when a theater group pays a playwright to use their script or when a TV station pays a production company to air their films, those also deemed royalty payments. However, royalties aren’t just related to the entertainment industry, they are also widely used in science, technology, industry, and commercial fields.
Businesses that use patented products often pay royalties to the whoever owns the patent, even the fees that a franchisee pays to their franchisor are considered to be royalty fees. Other examples of items that may involve royalties include software, models, secret formulas, and plans.
Royalties vs. Fees for Service
Some services seem similar to royalties, but the payments for those services don’t fall under the royalties category.
In particular, that includes the following:
- Service after a sale
- Services provided under a guarantee
- Technical assistance
- Opinions provided by a professional such as an accountant or engineer