New self publishers, who have previously worked as authors or who have studied up on publishing from the author's perspective, often confuse income with royalties. Authors work for royalties, and the much sought after advances authors receive are advances on royalties, i.e., an up-front sum of money that will be deducted from the future royalty payments the author would otherwise receive. A book is said to have paid-out if the author actually receives any royalties in addition to the advance. I don't have any statistics on the subject, but I know of non-fiction authors who have written a dozen books without ever receiving a penny in royalties because they have never caught up with the advance payment.
Publishers don't get advances, they pay advances. When you are a self publisher, you are taking on all of the risk and working on spec (speculation). The income that you earn is regular Schedule C income, and it starts with the first book you sell. The expenses that you incurred in publishing the book are then accounted for against the income, and if you have more income than expenses at the end of year, you've made a profit on which you have to pay taxes, just like any other business. As a side note, neither the income earned by a publisher nor the royalties earned by an author are treated as "royalties" by the IRS, for whom royalties means earnings from oil-wells on your land or from the Broadway Musical that your grandfather wrote (I wish:-). If you're regularly employed in the creation of the revenue stream, it probably can't be counted as royalties, unless you die and leave it to somebody. The importance of the definition is that royalties aren't subject to self employment tax.
Now we come to residuals. I don't know if there's an official publishing definition for the term that everybody else abides by, but to me, residuals represent any income from books you've published in prior years that continue to pay long after you've earned back your expenses. Actors use the term residuals for ongoing money they receive for reruns of TV shows or commercials, long after they've been paid for the original work. The thing about residuals is that they can be a danger to the momentum of a new publisher. If the residuals reach the publisher's goal for income and remain there without the publication of new books, it can really take the wind out of your sails. It certainly took the wind out of mine.
I'm got to thinking about this specifically today as I'm staying by chance for two nights at a beach front hotel in Tel Aviv. I tried making a publishing video down by the ocean but the wind noise ruined the audio. The whole concept of living on the beach and wasting away in Margarita Ville always escaped me, but that's the ideal scenario for some writers. To achieve a level of residual income that allows for an endless round of hotels, restaurants, sunny beaches and loud disco bars, or all they trance bars now? All I know is I'm on the twelfth floor and I can hear the bass speakers thumping away to the wee hours of the morning, and I don't like it.
So I'm glad that my gross income as a publisher will be down this year, the first time in five years that it hasn't move up instead. The reason is simple, I haven't published a new book since 2004 and I spend most of my time working on projects that have little or no value for my publishing business. I like to think I haven't wasted the last three years, in the publishing sense. I've answered a couple thousand e-mails, written a few hundred blog posts and posted a half-hour worth of video. But without the goad of falling income, I'm not sure I could have put myself back to work. So remember that residuals can have a hidden cost on productivity, what the Fed would call a moral hazard (and then proceed to cut rates anyway:-)