Debitoor's accounting dictionary

Royalties – What are royalties?

Royalties are payments made in exchange for the right to use another party’s property.

If you make or receive royalties, it’s important that you keep track of your payments. Try Debitoor for free and manage your income and expenses.

Royalty payments might be made as:

  • As a fixed, one-off amount
  • As a percentage of revenues
  • On a per-use basis.

How do royalties work?

Royalties are paid by the licensee (the party purchasing the rights to the property) to the owner (the party who owns the property).

While they pay royalties, the licensee is entitled to use the owner’s asset(s), but there are usually conditions that restrict how the asset can be used.

Licensees might pay royalties in exchange for using tangible assets, but royalty payments are most commonly made in exchange for the rights to intellectual property.

Who benefits from royalties?

Royalty arrangements can be beneficial to both owners and licensees. Owners benefit from royalty arrangements because royalty payments provide a source of income. On the other hand, licensees can benefit from paying royalties by gaining access to another party’s assets, which they can use to promote, grow, or establish their business.

Royalty contracts

When agreeing to exchange royalties for the right to use assets, the owner and the licensee need to agree how royalties will be calculated and paid, how the licensee can use the asset, and how long the arrangement will last for. The two parties usually sign and create a contract that creates legal obligations for both parties.

Royalty contracts protect owners from having their property mistreated or used without their consent. They also protect licensees by creating clear guidelines about how they can use the asset.

Common examples of royalties

Royalties are widely used in many different industries and sectors. Some common examples of royalties include:

  • Performance royalties: musicians produce copyrighted music, and anyone who wants to play the song in public or for commercial use must pay royalties.
  • Book royalties: publishers pay authors for the right to sell and distribute their books.
  • Mineral royalties: companies pay landholders for the right to take minerals from their property.
  • Franchising royalties: the franchisee pays royalties to the franchiser in exchange for the right to use their business name and branding.

Taxes and royalty payments

If you’re an author, musician, franchiser, or another type of business owner who earns money through royalties, the payments you receive are considered to be income, which means that you’re likely to incur taxes.

If you’re self-employed, you may need to pay Income Tax on the money you receive from royalty payments, and you will need to declare your income when you complete your Self Assessment tax return.

On the other hand, if you run a limited company, the money you earn through royalties will be subject to Corporation Tax.

Bear in mind that the amount of tax you pay depends on your total income, not just the amount you receive in royalty payments.

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