How Are Royalties Taxed When Paid to U.S. Nonresident Aliens?

How Are Royalties Taxed When Paid to U.S. Nonresident Aliens?


📅 October 23, 2024
⏱️ 5-minute read

💬 “I got paid royalties from the U.S.—do I have to pay tax?”

If you’re a nonresident earning royalties from the U.S.—for example, from music, writing, patents, art, or digital content—you’re not alone in wondering how it all works. Royalties can be confusing, especially when treaty rules, withholding taxes, and IRS forms come into play.

Let’s break it down simply. 👇

🎧 What Are Royalties?

A royalty is a payment made to someone for using their property or creative work. Think of it as a thank-you fee for your talent, invention, or intellectual property.

Royalties often come from:
🎵 Musicians or composers – paid when their work is streamed, played, or licensed
📚 Authors or researchers – paid for book or article sales
🎬 Actors and filmmakers – paid when their content is shown or distributed
💡 Inventors – paid for using patented technologies
🏞️ Landowners – paid for natural resource extraction (less common for nonresidents)

In U.S. tax terms, royalties are considered Fixed, Determinable, Annual, or Periodical income (FDAP) — meaning the IRS taxes them differently from wages or self-employment income.

💼 How Do Royalties Work?

Royalties can be structured in two main ways:

  • Percentage-based: You earn a percentage of each sale, stream, or use.

  • Fixed-rate: You get a set amount per unit (e.g., per download, per broadcast).

The key point: royalties paid from a U.S. source to a nonresident alien are taxable by the IRS, usually through withholding at the time of payment.

🧾 Do I Have to Report Royalty Income?

✅ Yes. Every nonresident who earns U.S.-source royalties must report them.

Your payer (e.g., record label, publisher, or platform) will issue you Form 1042-S, showing:

  • The gross amount paid

  • The amount withheld (usually 30%)

  • The income code (code 12 for royalties)

You’ll then include that income when filing your Form 1040-NR.

Failing to report royalties can lead to IRS penalties, refund delays, and even visa or green card complications later.

💰 How Are Royalties Taxed in the U.S.?

By default, U.S.-sourced royalties paid to nonresidents are subject to 30% withholding tax.

For example:
If you earned $10,000 in U.S. royalties, the payer must withhold $3,000 and send it to the IRS. You’d receive $7,000 net.

However, you might qualify for a lower rate—or even full exemption—if your country has a tax treaty with the U.S. 🎯

🌍 Common Tax Treaty Royalty Rates

Country Treaty Rate Notes
🇬🇧 United Kingdom 0% U.S.–U.K. treaty exempts most royalties
🇨🇳 China 10% Applies to cultural, scientific, and industrial royalties
🇮🇳 India 15% U.S.–India treaty caps royalties at 15%
🇩🇪 Germany 0–10% Depends on type of intellectual property
🇷🇺 Russia 0–10% Copyright royalties may be exempt; industrial remain taxable
❌ Brazil, Argentina, Chile No treaty 30% standard U.S. rate applies

🧭 Always check your country’s U.S. tax treaty article for details—it determines how much tax (if any) gets withheld.

📝 How to Report Royalties on Your Nonresident Tax Return

If you’ve received U.S. royalties, you must:

1️⃣ File Form W-8BEN before receiving payment

  • Certifies that you’re a nonresident

  • Allows you to claim treaty benefits upfront (reducing or eliminating withholding)

2️⃣ Receive Form 1042-S from the payer

  • Shows income and withholding amounts

3️⃣ File Form 1040-NR (Nonresident Tax Return) by April 15

  • Report royalty income on Schedule NEC, line for FDAP income

  • Include the withholding credit shown on Form 1042-S

4️⃣ Claim a refund if too much was withheld (for example, if a 30% rate was applied but your treaty allows 10%).

💸 Can I Claim My Royalty Tax Back?

Maybe!

You can request a refund if:

  • Your country’s treaty provides a lower rate, but your payer withheld 30% anyway.

  • You file a correct 1040-NR showing you qualify for treaty relief.

You cannot get a refund if your withholding already matches the treaty rate or if your country doesn’t have a treaty.

🧠 Example

Scenario:
Priya, an Indian artist, licenses her design to a U.S. brand and earns $5,000 in royalties.
Her payer withholds 30% ($1,500), but under the U.S.–India treaty, the correct rate is 15% ($750).

✅ When Priya files her 1040-NR, she reports:

  • $5,000 royalty income

  • $1,500 withheld

  • Claims a $750 refund due to the treaty rate difference

🧾 Forms You’ll Need

Form Purpose
W-8BEN Claim treaty benefits before payment
1042-S Issued by payer, shows income & withholding
1040-NR + Schedule NEC File your annual nonresident tax return
Form 8833 (If required) Disclose treaty position taken
ITIN (Form W-7) Needed if you don’t have a U.S. tax ID

⚙️ How J1 Summer Tax Back Helps You

If you earn royalties in the U.S., J1 Summer Tax Back can:

  • 🧾 Generate your W-8BEN correctly so you get treaty benefits from the start

  • 💰 Prepare your 1040-NR + Schedule NEC to claim refunds for overpaid withholding

  • 🌍 Ensure your income is correctly classified under FDAP/treaty rules

  • 📑 Secure your maximum refund while keeping you fully IRS-compliant

Whether you’re a musician, writer, or creator—we make the U.S. tax side simple, so you can focus on your art. 🎶