Royalties are payments made to someone who created or owned something that they allowed someone else to sell. The person will only receive a percentage of the total revenue that their creation or resource makes. These payments often go on for as long as the creation or resource is being sold.
Periodic royalties are payments that are made on a periodic basis. For example, the royalties may be paid annually or bi-annually. Recipients do not receive their payments immediately after a sale, but must wait until their next periodic payment. Periodic royalties are often paid when an author or artist allows their book, painting or music to be sold by someone else, such as a music label or publishing house. Inventors also get periodic royalties when the products they invent are sold and a land owner can get periodic royalties for allowing a business to exploit the resources on his land, such as oil.
The terms for periodic royalty agreements are usually spelled out in a contract that the creator or resource owner will sign before any sales are made. This contract will specify when and under what conditions the recipient will be paid. It will also specify what percentage of the total revenue the recipient will receive from his creation or resource. Additionally, it will specify how long the royalties will be paid and who will own the rights to the creation or resource after the contract between the two parties has ended. In order to protect themselves and their future, recipients should have a lawyer look over any contract before they sign it.
The tax implications of periodic royalties for recipients in the U.S. are different than regular income taxes. If the recipient is issued a Form 1099 at the end of the tax year, then the recipient will have to pay self-employment taxes on the money, as well as the usual income taxes. Recipients may not receive a Form 1099 if their yearly earnings are too low, but they will still be required to claim the periodic royalties on their annual tax filing.
If a person buys into a franchise, they may be required to pay the franchisor a percentage of their sales on top of the franchise fee. These royalties may be paid on a periodic basis, usually once a year. In exchange for these periodic royalties, the franchisee reaps many rewards, such as use of the franchisors business model, advertising by the parent company, establishment if it is a well-known business and the ability to source the product.
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