The Internal Revenue Service uses Form 1099 to track income from sources other than wages or salaries. If you are an independent contractor, you may receive Form 1099 reflecting your income from a business for the calendar year. Rents and royalties payments may come from diverse areas such as oil and gas resources or from the use of copyrighted material.
If you receive income from these sources, you will likely receive Form 1099 for reporting your income to the IRS. This form substitutes for Form W-2, reserved for wages and salaries of employees.
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Rents and Royalties
Rents include real property income and equipment rental for profit. The IRS considers this as income for tax purposes. Royalties may be natural resources royalties, often used for oil and gas property rights. Royalties also include use of motion picture and television scripts or publication of literary works or recordings.
The IRS has two basic rules requiring Form 1099 for rents and royalties. As a general rule, royalties require a Form 1099 for any amount in excess of $10; rents require Form 1099 at $600. This does not affect your obligation to report all income, even if you do not receive a Form 1099.
Consider Also: About the Different Types of 1099 Tax Forms: What You Should Know
Forms for Taxable Income
Schedule E, Supplemental Income and Loss, is the form for reporting Form 1099 rents and royalties to the IRS unless your business involves the rents and royalties. If you are in the oil and gas business, or if you are self-employed as a writer, screenwriter or inventor, use Schedule C to report your business income. Schedule C is your business profit or loss report for Form 1040.
As a general rule, royalties require a Form 1099 for any amount in excess of $10; rents require Form 1099 at $600.
Reporting Unearned Income
Rents and royalties may be unearned income for income tax purposes. This can make a difference to the retired individual and those who receive Supplemental Security Income or other social programs. Unearned income includes pensions, interest on bank accounts and rents and royalties paid independent of your work.
You may receive royalties for a previously completed article or book that is unearned income. If you are paid a fixed fee for the work, you are an independent contractor, and the IRS considers the payment as earned income. You must report both earned and unearned income on your federal income tax return.
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Constructive Receipt of the Funds
If your rental or royalty income is available to you and you do not accept it in this tax year, you must report it on your Form 1040 as income for this tax year. If you receive a check before the end of the year, you must include that amount in your federal income tax calculations even if you hold the check until the new year. The IRS calls this "constructive receipt" of the funds. You will likely receive Form 1099 reflecting the amount, whether you draw the funds or cash the check in the tax year.