One of the more challenging aspects of royalties and residuals is their unpredictable nature. Payments may arrive sporadically or fluctuate based on usage, such as a TV episode you starred in earning you sizable residuals initially but lessen as time goes on, or royalties from a popular song you released years ago suddenly spiking due to a new social media trend.
Because of this, the most prepared entertainers stay organized. You should utilize financial management tools and apps, such as Quicken or RocketMoney, when possible to track (a) when payments come in and (b) what amount you are receiving. Many digital financial and budgeting softwares allow you to input varying income streams. Doing so will help you keep tabs on incoming funds, which will make tax season less daunting when it comes time to account for multiple streams of income.
Building a Buffer Fund: Managing Peaks and Valleys
Traditional budgets often assume a fixed monthly income, but for entertainment professionals, a more flexible approach works best. It is a wise move to establish a financial buffer to cover expenses during leaner times, especially given the inconsistency of royalties and residuals. You should aim to set aside a portion of every check with the goal of saving enough to cover three to six month’s worth of living expenses.
It is recommended that you treat your buffer fund like a fixed expense. Budget these savings into your monthly finances and transfer a set percentage of each payment into savings automatically. You will be better prepared for months when royalty and residual payments are sparse by planning for sporadic income streams in advance.
Tax Planning for Royalties and Residuals: Staying Ahead of the Curve
Royalties and residuals are typically considered taxable income, though how these are taxed can vary depending on the nature of the income and how it’s classified. For example, ongoing royalties from music or literary works are often treated as self-employment income, which means you are responsible for self-employment tax in addition to income tax. Residuals, on the other hand, may be reported as ordinary income.
It is good practice to set aside a portion of your earnings for taxes as soon as you receive payment if taxes are not already taken out of your earnings. It is easy to overlook taxes when income is sporadic, but planning ahead will prevent any unpleasant surprises during tax season. For more professional advice, you may consider working with a CPA from Artists Financial Management that is familiar with entertainment industry finances. They can help ensure you are claiming relevant deductions and obtaining the proper credits while maximizing tax efficiency.
Investing in Your Future: Building Long-Term Wealth
Royalties and residuals offer unique opportunities to grow your financial portfolio, even as an irregular source of income. Some entertainment professionals choose to invest in retirement accounts such as IRAs or SEP-IRAs, which offer tax advantages and can be funded with pre-tax dollars if you are self-employed.
If you are comfortable with more aggressive investment strategies, consider exploring a brokerage account, which can be set up on your own or through a brokerage firm. You can create another stream of passive income that supplements your creative earnings by investing a portion of your royalty and residual income.
In general, diversifying investments is a great way to generate additional income streams, such as dividend-paying stocks. These investments can help smooth out the peaks and valleys of a royalty and residual income. Furthermore, be sure to review royalty statements and residual breakdowns closely, and do not be afraid to ask questions if something seems unclear. This is where having a trusted CPA or entertainment lawyer can be invaluable. They can help interpret complex contract terms and ensure you’re receiving your fair share.
Final Thoughts
For creative professionals, royalties and residuals offer the hope of financial longevity as a reward for your artistic contributions over time. With careful planning and a proactive approach, you can make the most of these unique income streams. It is important to set a solid foundation with a buffer fund, develop a realistic budget, plan for taxes, and invest wisely to transform these intermittent payments into long-term financial security.
Remember, financial success in the entertainment industry isn’t about predicting every twist and turn. It is about equipping yourself with the tools and strategies to navigate them with confidence. Whether you are receiving royalties from a viral song or residuals from a long-running TV show, an organized and mindful approach will ensure you are well-prepared for whatever comes next.
This blog is intended for informational purposes only, and should not be construed as tax, legal, or accounting advice. Please consult with your tax, legal, or accounting professionals for any advice and guidance.