A royalty is a payment made to the owner of an asset for the right to use it. A well-known example is a songwriter who earns money every time their song streams. Other examples include authors, inventors, franchisors, and landowners who allow companies to drill oil on their property.
Royalties are usually calculated as a percentage of the money the asset brings in, with the exact rate set by a licensing agreement between the owner and the user. The owner keeps the asset, and it keeps earning for as long as people keep using it. Because these payments arrive steadily, often over decades, royalties are typically used as a source of passive income.
In this article, we break down how royalties work and the main types you can earn, plus answers to the most common questions about them.
How Do Royalties Work?
You earn royalties through a licensing agreement, which is a contract between you, the owner, and the person or company (licensee) using your asset. The contract covers how much the other party pays you each time your asset gets used, and every industry structures this differently.
Say you wrote a book and signed with a publisher. The contract gives the publisher the right to print and sell your book, and you earn 10 percent of the cover price on every copy sold. If the book retails for $20, you make $2 per sale, whether it sells 500 copies or 500,000. You still own the book itself, because the publisher only has permission to sell it.
Music royalties work similarly, but with more parties involved. When a song plays on Spotify, part of the platform's revenue goes to the song's owners, which can include co-writers, a publisher, and a label. The rates are negotiated between the platforms, labels, publishers, and collection organizations, and they work out to about a fraction of a cent per stream.
How Royalty Rates Are Set
The royalty rate is the number in the contract that decides how much you get paid, like the 10 percent in the book example above.
Most royalty rates are negotiated, and the more someone wants your asset, the more leverage you have. For example, an owner with a unique asset or several interested companies can negotiate a higher rate, while a licensee with plenty of alternatives will usually negotiate a lower one.
Some rates are set by law instead of negotiation. US streaming mechanicals, for example, follow a government-set rate that's the same for every songwriter, no matter who they are or how popular their catalog is.
Every industry also has its own typical ranges, which we cover in the types of royalties section.
Royalty Payments
The contract also sets how payments are structured and when you receive them. They typically follow one of three structures:
- A percentage of revenue. The most common structure. You earn a set percentage of every sale or use, like an author earning 10 percent of each book sold.
- A flat amount per unit. You earn a fixed dollar amount each time, like 50 cents per item sold, no matter what the item costs.
- A tiered rate. The rate changes as sales grow. A deal might pay 5 percent on the first 10,000 units and 7 percent after that.
In most industries, the licensee pays the owner directly on a set schedule, along with a statement showing what the asset earned.
Music is the exception because radio stations, platforms, and venues all use the same songs, and artists can't collect from each one directly. Instead, Performing Rights Organizations (PROs) and similar groups collect the money from these sources and pay artists their share.
Advances and Minimum Guarantees
Some deals include an advance, which is money paid upfront before the asset earns anything. The advance gets recouped, meaning the owner doesn't receive royalty payments until the asset has earned back what was advanced.
Other deals include a minimum guarantee instead, where the licensee agrees to pay you at least a set amount each period, even if the asset earns less than that. If your royalties fall short of the minimum, the licensee covers the gap, and that amount usually gets recouped from your future royalties, the same way an advance does.
Larger deals often include both, with the advance counting toward the guaranteed minimum.
6 Common Types of Royalties
Here are six common types of royalties you can own:
1. Music Royalties
Music royalties are payments earned whenever a song gets streamed, played on the radio, performed live, sold, or placed in a TV show or ad. The money goes to whoever owns the song, which is the songwriter and publisher on one side and the recording artist and label on the other, since a single song has two copyrights that earn separately.
There's no single music royalty rate, because each income stream pays differently:
- Streaming royalties work out to fractions of a cent per play, split between the recording and the song.
- Mechanical royalties follow a government-set rate, currently 13.1 cents per copy for physical sales and downloads.
- Performance royalties come out of the license fees PROs collect, with ASCAP alone distributing $1.759 billion in 2025.
- Sync fees are negotiated per placement and typically range from a few hundred dollars to six figures.
The process of collecting music royalties is also more complicated because there isn’t one organization that collects everything. For example, songwriters have to register with a PRO to collect their performance royalties and the MLC to collect any streaming mechanicals.
For sync placements, a production licenses a specific song and pays a one-time negotiated fee to whoever owns it. The songwriter and their publisher then earn performance royalties every time the content airs.
2. Book Royalties
Book royalties are payments authors earn on every copy sold, paid by the publisher that licensed the book.
The rate depends on the format, with traditional publishers paying around 5 to 15 percent of the cover price, hardcovers at the top of that range and paperbacks at the bottom. Self-published authors keep a much larger share, up to 70 percent per sale on platforms like Amazon, because the platform only takes a distribution cut instead of a publisher's share.
Most traditional book deals also include an advance, which is an upfront payment the publisher recoups from the book's royalties. The author only starts receiving royalty checks once the book sells enough copies to cover the advance. Many books never sell that many, and in those cases, the advance is the only money the author receives.
3. Patent Royalties
Patent royalties are payments inventors earn by licensing their patents to manufacturers, usually as a percentage of revenue from products that use the invention. Apple, for example, pays patent royalties to Qualcomm for the modems inside iPhones.
Rates for patent royalties vary by industry and depend on how important the patent is. However, based on a decade of surveyed deals, a typical technology license pays about 5 percent.
Unlike most royalties, patent royalties have a hard deadline. A patent expires about 20 years after filing, and once it does, the invention enters the public domain and anyone can use it without paying. Both sides negotiate knowing when the payments end.
4. Franchise Royalties
Franchise royalties are ongoing payments a franchisee makes to the parent company for the right to operate under its brand. Each month, the franchisee sends the parent company a percentage of everything the location sold, whether the location was profitable or not.
Most franchise royalty rates fall between 4 and 8 percent of gross sales in the US, paid monthly or weekly for the life of the franchise agreement. A McDonald's franchisee, for example, pays 4 to 5 percent, in addition to the initial franchise fee and a separate contribution to the advertising fund.
The parent company owns the brand, the menu, and the operating system, and the monthly royalty is what the franchisee pays to use them. The location itself belongs to the franchisee, along with whatever profit is left after the royalties, rent, labor, and supplies are paid.
5. Trademark Royalties
Trademark royalties, also called brand licensing royalties, are payments companies earn by letting other businesses use their brands, characters, and logos on products. Some examples include putting a famous cartoon character on kid’s pajamas or a sports team logo on a t-shirt. The manufacturer has to pay the owner of the brand for every unit sold.
These deals often use per-unit rates instead of percentages, and the rate can change with volume. A contract might pay the brand owner 5 cents per item on the first 10,000 units and 4 cents on everything after, which rewards the manufacturer for selling more.
6. Mineral Royalties
Mineral royalties are payments landowners earn by leasing their property to oil, gas, and mining companies. The royalty is a share of the value of whatever gets extracted, called the production value, and the traditional standard for oil and gas is one-eighth, or 12.5 percent. However, negotiated leases often pay more.
The company covers all the operating costs, including the drilling, equipment, and labor, and the landowner's royalty comes out of the revenue before those costs are paid. As a result, the landowner earns royalties even if the operation loses money.
FAQs About Royalties
Here are answers to some of the most common questions about royalties:
Are royalties passive income?
In the everyday sense, yes. Royalties keep arriving without ongoing work, which is why people often treat them as passive income. The IRS doesn't use that label, though, and taxes them like regular income, which the next question covers.
Do you have to pay taxes on royalties?
Yes. The IRS treats royalties as taxable ordinary income, so they get taxed at the same rates as your wages. Most people report them on Schedule E. However, if you earn royalties through your business, like a working songwriter or self-employed inventor, they count as business income on Schedule C, which also means you have to pay self-employment tax.
How your royalties get taxed depends on the type and your unique situation, so it's worth asking a tax professional.
How long do you earn royalties?
Royalties last as long as the rights behind them. For music and books, that means copyright protection, which continues for the creator's lifetime plus 70 years. Patent royalties end when the patent expires, generally 20 years after filing.
Franchise and brand royalties last as long as the licensing contract does. Mineral royalties can continue indefinitely, since the rights are tied to the land and pay out for as long as companies keep drilling on it.
Can royalties be inherited?
Yes. Royalties are personal property under the law, so they can be passed down in a will or gifted like any other asset. Heirs collect for as long as the underlying rights last. Mineral royalties, for example, can stay in families for generations.
Can you sell your royalties?
Yes. Royalties are an asset, so you can sell them. You get a lump sum upfront, and the buyer collects the royalties you sold. You can sell all of your royalties or just a share of them for a set period of time.
The Bottom Line
A royalty is a payment for the use of an asset you own, whether it’s a song, a book, a patent, a brand, or oil-rich land. The owner keeps the asset and the payments continue for as long as people keep using it.
Music is one of the few industries where royalties are sold openly. Musicians can sell part of their catalogs on platforms like Royalty Exchange to fund new music and studio time, pay off debt, buy a home, support retirement, or simply get years of income upfront, all while keeping ownership of their songs and collecting on everything they didn't sell.
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