Income can be anything but predictable for professional creatives. If you are in the entertainment industry, you have likely experienced both the joys and challenges of managing royalties and residuals. Multiple income streams can be thrilling when they roll in, but their irregularity can make financial planning tricky. By understanding how to navigate and manage these earnings, you will feel empowered to take control of your finances, build a buffer for leaner times, and work towards a bright financial future.
Understanding Royalties and Residuals: What’s the Difference?
Royalties and residuals have distinct definitions, despite sometimes being used interchangeably.
Royalties typically refer to payments made for the ongoing use of intellectual property, such as music, books, or merchandise. For instance, every time a song plays on the radio, the songwriter earns a royalty.
- Music royalties are the most popular and varied, as they can be generated from multiple sources, such as mechanical royalties, which are paid by record labels or digital platforms when a song is reproduced, such as through CD sales, vinyl, or digital downloads, or performance royalties, which are earned when a song is publicly performed on the radio or in a live venue. There are also synchronization (sync) royalties, which are paid when music is used in conjunction with visual media such as in movies, TV shows, commercials, or video games.
- Entertainment professionals can earn royalties from their involvement in film and TV projects, such as home video royalties, paid when movies or TV shows are sold on physical media, or syndication royalties, typically paid when a film is sold to a new network.
- Artists and creators can also earn merchandising royalties from the usage of their intellectual property or image and likeness. For example, if an actor’s likeness or a creator’s logo is featured on product merchandise, they are likely paid royalties for this usage. Depending on the specific contract, merchandising royalties are calculated as a percentage of net revenue or a flat fee per item sold.
Residuals, according to SAG-AFRA, are “compensation paid to performers for use of a theatrical motion picture or television program beyond the use covered by initial compensation.” In other words, residuals are essentially payments for repeat broadcasts or additional uses of your work through free TV, basic cable, pay cable, and theatrical productions. In modern film and television, it is common for entertainers to receive residuals when a show goes into reruns, is released on DVD, or streams on platforms like Netflix. Residuals reward you for both the longevity and popularity of your work, thus allowing you to continue benefiting from a successful project over time.
- Residuals can be earned from a number of media but are primarily sourced from television and film. This can include network television, which include shows or movies that re-air on major network television such as ABC, NBC, or CBS; cable television for shows or movies that re-air on cable networks; or even foreign use, for shows or movies that are distributed internationally. These residuals are calculated separately and may be subject to different rates depending on the country or region.
- In addition to film and television residuals, entertainment professionals can also earn commercial residuals via television, radio, or digital advertisements. Residuals are earned when an ad airs beyond the initial contracted run or reaches specific markets. This can include TV commercials, which pays each time the commercial airs; internet/digital commercials where residuals calculated based on the number of views; or what is called ‘wild spot residuals,’ when a commercial is licensed to air on a variety of stations across the country rather than on a single network.
Streaming Services: Disrupting Tradition
It’s also important to note that streaming services are forcing change upon how residuals are handled. Traditionally, the more popular the show/the more reruns and syndicated broadcasts aired, the higher the residual returns were. This was beneficial for shows that aired in the late 1990’s and early 2000’s, such as “Friends” and “Seinfeld,” because the actors received larger residuals for reruns and syndicated broadcasts, both of which were popular at the time.
Streaming services have brought about change because of the creation of ‘original series,’ such as “Orange Is the New Black,” which never aired on cable. These shows received millions of streaming views; yet, the performers could not be fairly compensated for reruns and syndicated broadcasts in the same fashion as traditional television shows. Thus, under the SAG contract ratified in December 2023, performers are now compensated for their success on streaming platforms outside of the traditional linear residual structure.
Mastering Your Final Future with Royalties and Residuals
Navigating the world of royalties and residuals as an entertainment professional can feel complex, but understanding these income streams is essential for financial success. By distinguishing between royalties and residuals, you can better anticipate and manage your earnings. With the right tools and knowledge, you can take charge of your finances and thrive in the dynamic entertainment industry.
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.