Technically speaking, authors are only payed a percentage of the profits of the book when it's sold. This is why the money an author receives prior to publication is called an "advance." It is a flat amount that the publishing house gives to the author no matter how well or how poorly the book sells. (It's usually in installments--a bit on signing the contract, on turning in a draft that is accepted by the editors as ready to go into the copy editing process, and a chunk on publication.)
An author-publisher contract will outline what percentage of the book price belongs to the author. For authors just starting out the percentage begins around 10% of each book sold, but can begin at up to 25% or more for more bankable proven authors. I say "begins" because this percentage is often on a sliding scale. The percentage of the book price an author receives usually increases with the numbers of books sold.
For example, an author may receive 7% of the sales from 1 to 10,000 books, 15% from 10,000 to 30,000 books sold, and 25% on books sold from 30,000 copies and beyond.
So, an advance is really just a bit of the projected profits that the publishing house is willing to pay upfront, a bit that they cannot take back no matter how few books are sold. That said, future payments or "royalties" are only payed to the author when the publishing house has recovered that advance. They calculate the author's percentage of every book sold and apply that bit to the amount they've already paid out.
For first time authors, the publishing house will often make the first print run of the book a "break even print" this means that if all the books printed sell, the author's advance will be recovered by the publishing house, but royalties for the author above that amount will be impossible unless the book goes into another print run.
To make this a little less confusing, I'll outline the math with an example...
- The author gets word from her agent that the publishing house wants to give her a $33,000 advance! (Woo hoo!)
- She signs an author-publisher contract with the following parameters:
7% on books 1-10,000
15% on books 10,000-30,000
25% on books 30,000 and beyond
- The publishing house pays the author $15,000 of her advance on signing the contract.
- The publishing house pays her $10,000 of her advance when she hands in a manuscript that the editors are happy with.
- The publishing house decides to print 20,000 copies of a book that will cost $15.00.
- The publishing house pays her $8,000 when the book hits bookstores.
- The book "sells through," meaning it sells out of all printed copies. But the publishing house decides not to print any more.
- The book has sold 20,000 copies. The author's percentage would be $10,500 for the first 10,000 books, and $22,500 on the second 10,000 books. That means that the publishing house has recouped their $33,000 advance to the author, and banked $267,000 (less production costs).
Now, a word on agents. Our intrepid author would never have made contact with the publishing house if it hadn't been for her agent. Her agent receives 15% of everything the author receives (some more established authors negotiate an agent percentage closer to 5 to 7%). In fact, the publishing house sends the money to the agent. The agent takes his percentage and then sends a check to the author.
Meaning, when all is said and done the author actually receives $28,050 before taxes.
I know all this because I am a published author, with several agents, publishers--and books sold. Hope it helps!