Good question. I have the same situation, although the compensation is paid via 1099MISC since he is an independent contractor and does consulting work for others as well. Then he gets a separate 1099 for the royalties. As far as I know, the 20% deduction was only for "business" income which I assumed was for Sche C's, 1120-S, and 1120's, maybe partnerships, but not royalties? I confess I have not studied up on this as yet.