For my game Brickster (http://www.valengames.com/) I contracted out a portion of the art in exchange for royalties. What I didn't think about at the time was how I would report royalties as an expense when it comes time to do taxes. For those of you who pay out royalties, how do you deduct them for tax purposes? My friend's father works as a tax collector, and according to him as long as I write a check and write "for services rendered" in the memo area, or get the artist to give me an invoice I should be fine. Does that sound right to you?

For my game Brickster (http://www.valengames.com/) I contracted out a portion of the art in exchange for royalties. What I didn't think about at the time was how I would report royalties as an expense when it comes time to do taxes. For those of you who pay out royalties, how do you deduct them for tax purposes? My friend's father works as a tax collector, and according to him as long as I write a check and write "for services rendered" in the memo area, or get the artist to give me an invoice I should be fine. Does that sound right to you?

Different countries will have different standards of proof, but generally speaking as long as you can show the money going out of your account and how the expense was a related business expense you should be fine. Given that it varies from place to place you might want to get an accountant to help you out with a nice formal way of keeping track of it. Get someone to help you set up all your accounting and then take it from there.

In the US, I would imagine that if you have a signed contract with the artist, that would be sufficient to prove the deduction. Barring that, the cancelled check is probably okay too. Probably the best way to handle this situation would be to file a 1099-MISC, which is the IRS form for reporting royalty payments (though your artist may not be happy about that since he/she may be *ahem* choosing not to report the royalties he/she is recieving from you ;)). Of course, all of this only matters if you get audited anyway, and the chances of that are pretty slim.

In the US, IIRC, if you pay a vendor/contractor/whatever more than $600, you're supposed to file a 1099-MISC with the IRS.

On the other hand, none of my payment processors have bothered to send me a 1099-MISC for the last 2-3 years, so maybe that requirement has changed.

Your cancelled checks, your bookkeeping, etc., should be sufficient paperwork to verify your expense/royalty payout claim.

If you're not wanting to learn all the rules yourself, you can hire a CPA and/or bookkeeper. You don't have to have them on staff. There are people who will meet with you on a regular schedule (weekly/monthly/whatever) to help you keep things up-to-date and properly recorded. Ask local businesspeople you know for recommendations.

-David

We send out 1099-MISCs to all U.S. developers to whom we pay royalties (and to the IRS with a 1096), regardless of the amount. We've probably been doing this since 1996 if I had to guess.

Thanks for all the responses, looks like I'll have to talk to a CPA sometime.