For federal tax purposes, percentage depletion is calculated on the gross royalties or gross WI income, before deduction of expenses. If you own the minerals as an individual, then the royalty income and expenses are reported on Schedule E and the working interest income and expenses are reported on Schedule C. Working interest income is classified as earned income and you will owe self-employment taxes on the net profit. Royalty income is treated as investment income. If you own in an entity or the WI is in an entity, then you need to file the appropriate tax forms. Consult your tax advisor for more in-depth information and for proper tax treatment as the federal and state tax treatments may not be the same, including the depletion rates.