If you get royalties from your PRO, publisher, web administrator, label or other payer for your songs, you likely will receive a Form 1099 from them stating the amount that was reported to the IRS as income to you during the past year.
Royalty income is considered “other income” for tax purposes and has to be reported by you when you file your federal tax return. The Internal Revenue Service is quite aware of those businesses in the music industry that make royalty payments to songwriters, publishers, artists and others, and your failure to include your royalty income when you file your taxes usually will be noticed fairly quickly.
If you don’t report your royalty (or other kind of) income — or if you don’t file a tax return and you are required to do so — the IRS may one day send one or all of your royalty payers a Notice of Levy (NOL), which garnishes future royalty income to pay past-due tax bills.
For those of you who fortunately have never been subject to a NOL, let me tell you what it would mean to you if you were.
An NOL is served on the paying company and directed at a specific person and tax number. It lists one or more tax periods that are deficient and by how much. The amount of the assessment for each tax period is listed, along with an additional amount for interest that you owe the government for not giving them your taxes when they expected it, as well as another additional amount for a penalty for paying late. The interest and penalties get bigger every day that the tax deficiency exists. Many levies have very small principal amounts and huge interest and penalty payments because they were ignored for so long. Often, the IRS waits many years after the original due date to send a levy, which kicks up the amount owed substantially.
It is up to the receiving payer who gets served with the NOL (called the garnishee) to stop paying you any additional royalties once the NOL is in its hands, and to remit to the U.S. Treasury all future royalties until the amounts listed on the NOL are paid off. You would have been sent an advance copy of the NOL by the IRS before the payer got its service, so when BMI or Warner/Chappell or Def Jam sends you notice about the levy it got, you shouldn’t be in shock about it. They also would have liked you to take care of paying it off before they had to get involved.
Because an IRS NOL captures 100% of your garnished income (because it isn’t wages, which has a limit) until that NOL is satisfied from your future royalties (or released by the IRS), you will not see any more royalties from that garnishee. Because several payers may be garnished against you at the same time for the same periods, it is possible that one of them, with bigger payouts for you, will pay off the levy faster than the others, and it’s up to you to get a release in the hands of the others so they can take the NOL off their books.
No royalty payer likes to be garnished; besides having to deprive creators and copyright owners of their royalty earnings, the administrative processes needed to properly track and account for levies is a drain on their time and resources. But we all have no choice. If a garnishee ignores a NOL, it could be fined a multiple of what was levied. And since the responsibility for paying your taxes is yours, no payer is willing to subject itself or its other royalty earners to having to indirectly contribute to your tax bill.
By the way, the IRS is not the only tax agency that garnishes royalties: New York and California are particularly active in doing so for unpaid taxes and child support obligations. Moreover, if a court judgment ever was awarded against you for any reason, the judgment creditor also can grab your royalties. Although the time periods vary and the portion of money turned over differs depending in where the service comes from and what it is, the end result is the same — you aren’t going to get everything you’ve earned from your creations if you don’t keep your financial affairs in order and pay your debts.
So as April 15 approaches each year, keep in mind that old adage that the only things that are certain in life are death and taxes. And if you don’t pay your taxes, a NOL may kill your future creative income for many years.