How Royalties Work   

Royalties are payments of various types to owners of property for use of that property. Royalties usually deal with payments for the right to use intellectual property, like copyrights, patents, and trademarks. 

A. In music, royalties are paid to owners of copyrighted music, for its use. These are called performance royalties. 
B. In art and online, royalties may be paid for the use of images (sometimes called "stock photography"). 
C. Another type of royalty is a book royalty, paid to authors by publishers. 
D. Patented products are commonly licensed and royalties are paid to the patent holders. 
E. In franchised businesses, the franchise holder pays franchise royalties to the main company for the use of the name and other assets. 

Royalties may also be paid in the context of rights to take minerals from the property of someone else. These are often called mineral rights, rather than royalties, but they work the same way. 

Why Do We Have Royalties?  
Royalties protect the owner of intellectual property (like copyrights, patents, and trademarks) and other types of property. These royalties are granted by agreement, and they allow others to use the property, giving the owner the benefit of an income from this use. Royalties also protect the buyer from claims by the owner for improper use.

Today royalties might be paid for the right to use various types of intellectual property, as noted above. In each case there are two parties: understanding royalties 

The person or business that owns the intellectual property (the owner)
The person or business that wants to use this property (the licensee) 

How Are Royalties Paid?  
If you have intellectual property (copyright, trademark, or patent) that you want to receive royalties from, there are two ways to do this: 

You may sell the property and receive payments from the buyer based on a percentage of the revenue generated from that property. For example, you can sell the copyright to a book outright and receive royalties up front and receive a continuing stream of revenue based on the sales of the book. You may keep the ownership to the property and get royalties from someone for use of the property. This is called licensing. 

Royalty fees and payment amounts can be set in a variety of ways. For example, in a franchise situation, fees can be set as a fixed or variable percentage of gross sales. In many cases, there is a minimum royalty.

A variable percentage is often used for newly created IP. In this case, the royalty percentage might be small in the beginning as sales are low. Then, as the sales increase the royalty percentage might increase to a maximum amount.

Each type of royalty payment has benefits and drawbacks for each party. The discussion is part of the negotiation process.

How Do Royalties Differ From Licenses?  
A license is right to use something that is owned by someone else, while royalties are the payments for that use. At its simplest, you have a license to drive a car or a license to own a business. The payments you make to the state agency are in effect like royalties.

If your business owns a patent on a new product, you can grant a license to someone to produce that product and sell it. Your business is paid in one of several ways by the licensee; these are royalties. 

Licensing your business's intellectual property and getting royalties from these licenses is a common way to increase your business income. 

What Is Included in a Royalty Contract?  
While royalty contracts differ depending on the type of royalty, there are some common features in royalty contracts: 

A detailed description of the subject matter (the property) and who owns it, in detail, with a term that describes the property in the contract. For example, if you are selling the right to use a group of your images to an online image company like Getty Images, you would describe your images in detail (maybe with a listing) and say, "the Images" throughout. 
The scope and limits of the use of the property. For example, you might allow someone just a one-time use, or a perpetual use (license) of your images.

The payments (the royalties themselves), including when the payments are to be made, how the amount of payments is determined, and how records are to be kept. Sometimes there is an advance payment made, which the owner works off (called an "earn out"). 
In an author contract, for example, there is commonly an advance. Then, when the author's portion of royalties from book sales exceeds the amount of the advance, additional royalties are paid on sales. 

How Do Taxes Work on Royalty Payments and Income?  
Like other forms of payment in a business, royalties are taxable income and also a business expense. 

Royalty Receipts as Income
If you receive royalties from someone for use of your property, you must claim these payments as business income. In general, any royalties you receive are considered as income in the year when you receive them. If you receive royalty payments as income, where that income is recorded depends on whether or not you are in a business and the type of business. 

If you own a business and you are self-employed, you must record the income from royalties on your business tax form, depending on your business type. For example, if you are a sole proprietor or single-member LLC, you would record the income on Schedule C, as part of your personal tax return. If your business is a corporation, the corporation must show the income on its balance sheet and on tax documents. 
If you don't own a business, your income from royalties is recorded on Schedule E - Supplemental Income, on your personal tax return. In this example, maybe you have written a book and you have a publisher, but you haven't set up a business structure. 

If you sell the right to the intellectual property, the sales price is considered business income in the year it is received. If you receive an advance on future income from royalties, this is also business income. 

Does combing the ever-confusing topic of music royalties have you ready to run for the hills? Although understanding royalties can undoubtedly be challenging, once you have a few basics down, everything else will fall into place. As you begin to learn about royalties so you can get paid, commit these five music industry terms to mind. They'll help you get the lay of the land with this whole royalty business. Click on any of the terms to get a more in-depth look at the topic.

Mechanical Royalty 
A mechanical royalty is a royalty that is paid on a physical (or digital) copy of a recorded song. The term "mechanical royalty" comes from the days when records were made "mechanically," which may help you remember the definition. A mechanical royalty is paid by record labels (or anyone releasing an album) to songwriters for the albums they press featuring that songwriter's material. Sometimes mechanicals are paid on all of the albums a label presses, and sometimes they are paid on all of the albums that are pressed and distributed (in which case, the label doesn't have to pay on what they don't sell).
The rate at which mechanicals are paid is negotiable and varies from country to country, but there is usually a minimum rate that has to be met.

Performance Rights Royalty 
Unlike a mechanical royalty, a performance rights royalty is paid to a songwriter on a live performance of a song. Although a live performance of a song can be a live performance, like a concert, a live performance can also be a public playing of a recorded song, like a radio play. These royalties are collected by performance rights societies, in australia this would be APRA AMCOS and internationally like Publishers (ASCAP) or Broadcast Music, Inc. (BMI), which monitor media for live performances of songs. These groups issue licenses that allow a business to host live performances of all of the songs that they represent, and then they distribute the licensing fees among their songwriter and publisher members depending on how frequently that writer's or publisher's song was used.

Blanket License
A blanket license gives the rights to use a large amount of music for a set period and is applied in cases where individual song licenses would be difficult to manage. Blanket licenses are used by performance rights societies to give license applicants access to the entire catalogs of their members. For instance, say you are a songwriter who has registered your songs with BMI. Radio stations, television stations, clubs, restaurants, and other venues who are awarded a blanket license from BMI then have a right to host public performances of all of the songs registered with BMI, including all of your work. BMI tracks how those license holders use the music, through a mix of monitoring and reporting by the license holder, and then uses those license fees to pay you your performance rights royalty for the public performances of your songs.

Blanket licenses vary in price greatly, depending on how often the applicant uses the music and how large of an audience they reach.

Publishing Deal
The easiest way to think of a publishing deal is to consider it a record deal for songwriters. When a songwriter signs a publishing deal, the publishers handle the so-called "administration" of the music. They go out and seek licensing opportunities for their songwriters, issue licenses for their songwriters' works, and in some cases, they even get involved in the creative process with the songwriter. In exchange, the publisher collects a portion of the royalties and other income generated by the songs they represent.

In the case of performance rights royalties especially, publishers usually have memberships in the performing rights groups that their songwriters belong to, and they allow those groups to handle that royalty collection.

Tour Mechandising 
In the early days of your music career, your tour merchandising may be as simple as your friend selling your shirts at the back of your show. As your career grows, however, tour merchandising companies may take over the work. They license your name and likeness and then pay you a royalty on the items they sell. The specifics of these deals can vary greatly, but something in the 30 percent royalty range is pretty common (at least in the United States). The bigger your shows get, the larger the royalty you can negotiate since the companies can sell more products. Typically, to receive your royalty, you may be required to play to a minimum number of people at all of your shows. Your manager will help you negotiate your tour merchandising royalty. 

Jellybeats  or it's producers only accept or enter royalty payment agreements upon both parties choosing to do so by written agreement or collaborating of a recording. This occurs typically when both parties decide to make an original song or an artist has written a song and would like us to produce it. Ownership percentages are 20% / 80% in favor of the original writer of the song. We are members of APRA AMCOS Australia who deal with royalties and provide copyright and licensing information. We also may choose a third party aggregator or publisher to sell music. If you don't have a royalties agreement with us, you'll need to join a preferred distributor or publisher to sell your music. All aggregators/distributers will charge annual fees from $10 per song, and upwards, we are also required to pay these fees. We (Jellybeats) are not aggregators/distributers. Recording a song with us for commercial sales requires a third party distribution. Distribution fees are annual and will need to be renewed every 12 months to avoid been taken down by streaming platforms. Streaming arrangments by jellybeats productions do not expire when you renew your agreement annually. We don't knowingly accept any use of unlicensed samples in our productions, any audio material you provide must be your own, or you've already obtained permission from the artist to use them in your song. Not doing so will render your rights as a partner void at our discretion without further notice. If this occurs and we have monies owed by an artist or persons responsible for the artist/song, there may be legal ramifications as a result of your misconduct. The artist will be fully accountable in the court of law here in Melbourne Australia, for any legal dispute relating to an illegal sound recording, that has been provided by you, the artist. If you violate any copyright laws, you will be held accountable for removing all responsibilities from us (Jellybeats or its producer/s). Jellybeats is a service to help artists get discovered and help them grow. If you don't agree with the conditions above this service is not for you. 

Note: Note: The information provided on this website is only a guide to the broad laws in regards to copyright | distribution | publishing | or licensing of a sound recording. The intention is to guide artists to make a guided decision. We advise that you check copywriter laws and/or requirements in your jurisdiction, or seek a music attorney to understand better copywriter music laws including how to use licensed material.  Music Copyright laws are  broad and complicated if you have any doubts, you should seek legal advice. At Jellybeats we don't proclaim to be music law experts, we do, however, try to provide you an insight for guidance only.