Video · 4 minutes · captions on
Royalty income and your 1099
Transcript
Introduction
In January, your 1099-MISC arrives. The royalty number on it is bigger than the checks you cashed. Here is why, and where it goes on your return. A payor that paid you ten dollars or more in royalties during the year sends you a copy by January 31. Box 2 is the royalties box. For oil and gas, it holds the gross amount, before the severance and other taxes that were withheld and paid.
Why the 1099 is bigger
Your stub takes the state's tax out of the gross before it pays you. Take one oil line, July 2026. The gross value is one thousand sixty-one dollars and eighty-five cents. The severance tax, at four point six percent, is forty-eight dollars and eighty-five cents. The check carries the net: one thousand thirteen dollars. The 1099 reports the gross. Box 2 is gross. Your checks are net. The tax is the gap. For oil, the tax is four point six percent of market value. For gas, it is seven and a half percent.
The 1099 counts by date paid
Stubs are labeled by sale month, but the 1099 counts what was paid during the calendar year. Oil is due sixty days after the end of the month it sold. So a November sale is paid in late January, and lands on the following year's form. Match your checks by the date paid, not by sale month.
Where it goes on your return
Royalties from oil, gas and minerals go on Schedule E, Part I, line 4. Enter the gross amount, even if taxes were withheld, and put the taxes the producer withheld on line 16. A depletion deduction, if you claim one, goes on line 18.
Depletion
Depletion is a deduction for the mineral that is used up as it is produced. For oil and gas, royalty owners can figure it at fifteen percent of gross income. Take fourteen thousand eight hundred thirty dollars of gross income, times fifteen percent, and you get two thousand two hundred twenty-four dollars and fifty cents, before the limits. The amount depends on your whole tax picture, so give your stub numbers to a tax preparer.
If you inherited the minerals
If you inherited the minerals, your tax basis is generally the fair market value at the date of death, or on the alternate valuation date, if the estate chose it. It is not what the owner paid. Get that value before the first 1099 arrives in your name. It is where cost depletion starts.
Reconcile in ten minutes
To reconcile your 1099, take ten minutes. One: add up your checks by payor, using the date paid. Two: add back the taxes. Each stub shows the severance and other production taxes paid. Checks plus taxes should be close to Box 2. Three: look at what is left. Gas deductions, and payments that fell in another year, can each move the total.
Ask for a breakdown
If Box 2 still does not add up, ask the payor for a breakdown. Please send a breakdown of the payments reported in Box 2 of my Form 1099-MISC, by check date and property, and tell me the severance taxes included in the gross. Keep a copy, and ask for a corrected form if the amount or the taxpayer is wrong.
What to do next
Add up your checks and taxes with our free 1099 royalty reconciler. The sources for this video are on screen.
The 1099 example is a real lease with a sample owner.