The contract should also clearly stipulate the date by which receipts or expense reimbursements must be tendered to the other party. For instance, if a bookseller issues full payment to one collaborator, the contract might stipulate that the party receiving the payment will send the other collaborators their shares via check or PayPal within two weeks of receipt of the payment from the bookseller, along with a copy of the bookseller’s royalty statement as verification.
The contract might further require that the parties must agree in writing in advance regarding expenses. The party incurring the agreed-upon expense should send a copy of the original receipt to the other party, along with a written request for reimbursement of the other party’s share within the stipulated time period for reimbursement.
In cases in which one collaborator handles all of the financial transactions with third parties, the contract might allow this party to deduct the others’ share of expenses from payments due or to hold on to royalties for payment of upcoming expenses. While this type of offset would eliminate the need for multiple transactions between the collaborators, it could make record-keeping a bit more complicated. The parties will need to decide whether they want to allow offsets or whether they prefer to account for each particular item of income or expense separately. Issues may arise if one party incurs significant expenses and has to “float” the others until royalties come in, or if the party receiving royalties from the bookseller holds on to them indefinitely in anticipation of upcoming expenses. There may also be disputes about the validity or necessity of expenses.
For this reason, it’s critical to have a detailed discussion about how finances will be handled and for the contract to accurately reflect the agreed-to terms.
Be sure to keep good records to document the monies coming in and going out. Be sure to also keep a copy of the collaboration contract in your tax files. The IRS will likely ask for it if you are audited.
At the end of the year, any party who receives royalties directly from booksellers should receive a 1099-MISC from the booksellers reporting the royalties in Box 2. He or she should report the full amount as gross receipts on Schedule C, even if some of these royalties were paid to other collaborators. Because the IRS computer matches the amounts on 1099s to the receipts reported on Schedule C, failure to report the full amount is an invitation for audit.
There’s no need to worry about over-reporting, however. Because the party who receives the 1099 from the booksellers would take a deduction for the amounts paid to other collaborators during the year, the net profit reported at the bottom of Schedule C would be correct and the party will be taxed only on his or her share of the net profits. The deduction for royalties paid by one collaborator to the others could be taken either on Line 10 as “Commissions and Fees” or could be disclosed on Line 27 “Other Expenses” as “Royalties paid to collaborators.”
By the end of January, any collaborator who remitted $600 or more in royalties to another collaborator during the preceding year should issue a Form 1099-MISC to the other collaborator to report his or her share of royalties. The amounts should be reported in Box 2. The 1099-MISC forms must also be filed with the IRS by the end of February along with Form 1096 Annual Summary and Transmittal of U.S. Information Returns. Note that these forms must be in scannable format and thus cannot be downloaded from the IRS website. They can be ordered through the website, however, or by calling 1-800-829-3676.
Whether or not you receive a 1099 from another collaborator, you are required to report your share of the receipts. Be sure to keep track of your receipts during the year so that you can accurately report when tax time comes.
As for expenses, the party who incurs an expense should deduct the full amount of the expense, but must also include as income all expense reimbursements received from the other collaborators during the year. The other collaborators are entitled to a deduction for their share of expenses that they reimbursed during the year. This way, all of the collaborators’ net profits will be accurately reported.
Wishing you all happy collaborations and big net profits!
Diane Kelly is a CPA/tax attorney and the author of the humorous Death and Taxes romantic mystery series from St. Martin’s Press.