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Permalink Reply by Lowell Todd Armstrong on March 8, 2011 at 5:59am

No gas producer withhold Fed, State, and FICA taxes from your royalty checks. Only employers do this.

 If your checks are substantial (ie. Several $1000/Month), you should send quarterly payments of you estimated taxes to the IRS, and State Taxing Authority.  If you do not do this, even if you have the money in the bank to pay your tax bill on April 15th (and that tax bill can easily be in the 10's of $1,000), they can still come after you for failing to pay on a quarterly basis.

If your Royalty Checks are not as big (ie. $1000/Month or less) you can simply greatly increase your withholding on your job (ie. claim zero dependents). If you go this route, you will probably have to write a check on April 15th but it will not be out of hand.

many of you are now in the high income range.  DO NOT SCREW with the IRS. They target people with sudden jumps in income for extra auditing, because they know that the newly rich make tax mistakes, and they are likely to extract additional taxes and penalties.

All Royalty owners take note, when filing your taxes: CLAIM YOUR DEPLETION ALLOWANCE.

The Depletion Allowance is there for a reason. The natural resources under your property are being depleted. This is a real loss in value, and the depletion allowance on your taxes is how it is account for. The simplest calculation is a flat 15% of the revenue you receive from royalty can be deducted. IF your cash flow is large enough, you may want to go to the expense of having a Reservoir Engineer come up with a "Depletion Schedule" for your property so you can claim a larger depletion percentage ( with the decline rates on the Marcellus well the first few years of production will deplete a much larger percent of the ultimate reserves than the later years will).