Categories

Archive for January, 2011

Why Are Book Royalties Self-Employment Income?

I get this question sometimes by people who’ve cruised through the tax forms and realize that royalties often have a lower marginal tax rate than their other income and are not subject to self-employment tax. So if you’re receiving royalty payments from a publisher or self-published works, you should be able to report them as royalties and avoid self-employment tax and lower your federal tax burden, right?

I wish.

Unfortunately, the IRS does not view book royalties as the same type of income as other royalties, such as mineral rights royalties. Here’s a teeny excerpt from the IRS for the naysayers:

The royalty payments made by the publisher to the literary agent and the royalty payments made by the literary agent to the author thus are not reportable under section 6041 and the regulations thereunder because such payments are payments to which 6050N applies. The publisher must file Form 1099-MISC reporting payments of royalties to the literary agent pursuant to section 6050N. If the literary agent is a corporation, no Form 1099-MISC is required pursuant to sections 6050N(c) and 6049(b)(4)(A). The literary agent must file a Form 1099-MISC for the royalties paid to the author regardless of whether the literary agent receives a Form 1099-MISC from the publisher.

What this means, is that if you are self-employed as a writer, then all your writing income must be reported on Schedule C and is subject to self-employment tax and your marginal tax right – after your writing deductions, of course. Which is why it’s so important to ensure you’re taking all the deductions you’re due for your writing business. Consider this, if you’re working a full-time job and writing (and most of us are) your marginal federal tax rate could easily be 25%. Add another 15.3% in self-employment tax to that and you’re paying in 40% of every net dollar earned from writing in taxes.

Sorry to report that there is no tax avoidance available to writers by electing the royalty route. If you try, you’ll likely get a terse letter back from the IRS along with a tax bill, complete with penalties and interest attached to the underpaid taxes due. Not the notice you want in your mailbox.

Win a Free Kindle!

If Santa didn’t bring you a Kindle…we’re giving one away!

Over at the Killer Fiction blog we’ve just added a whole slew of new fab authors to our regular roster, and to celebrate, we’re having a “Start your New Year off with a Bang” bash. We’ll each be giving away daily prizes (such as amazon/bn gift cards) for twelve days, from Jan 10th – 21st, and one grand prize of a KINDLE!!!

The entry qualifications are posted on the blog sidebar, but basically, the more times your visit and the more people you tell to visit, the more times you’re entered to win the grand prize.

And why a Kindle, you ask? Besides the fact that ereaders are mega-cool, many of the Killer Fiction bloggers are former Dorchester authors who have received rights back on their previously-published books and are now making them available at a discounted price to readers everywhere.

So come join the fun over at Killer Fiction. It only takes a second to post, but the rewards can be huge!

Business Tax Relief for 2010 and 2011

After much arguing and fighting, the new tax legislation is finally in place. The Bush tax cuts are extended, which is a really good thing for dual-income, married-filing-jointly households, and in addition to extending the Bush tax cuts, a couple of items passed will provide some much needed business tax relief for the self-employed for 2010 and 2011.

One cool change applicable to the 2010 tax-filing year is that your monthly health insurance premiums are deductible on your Schedule C with your other business expenses instead of on Form 1040. The big advantage to taking the deduction on Schedule C is that it reduces your business income prior to the calculation of self-employment tax. The self-employment tax rate is 15.3 percent, so multiply the total of your monthly health insurance premiums by the self-employment tax rate to figure your tax savings. Note: This is not a permanent change, so be certain to check in future tax-filing periods to see if the deduction is still allowed.

The second major item of business tax relief is also a change to self-employment tax. For the 2011 tax year, the self-employment tax rate will decrease by 2 percent. That lowers the self-employment tax rate to 13.3 percent for the 2011 tax year. Make sure you incorporate this change in self-employment tax rate when calculating your quarterly estimated tax payments for the 2011 tax year. Note: This cut in tax is applicable to the social security portion of the self-employment tax rate and will also be given to employees. If you are also employed with another company, you will receive a 2 percent reduction in your social security tax withholdings on your payroll checks. The decrease in the social security tax withholdings will not affect your social security benefits at retirement.

Part of the extension of the Bush tax cuts is maintaining the tax rate schedules at the same income ranges as before. Along with this freeze on tax rate schedules, the standard deduction and personal exemptions rates will also remain the same. The freeze on tax rate schedules combined with the monthly health insurance deduction change for 2010 and the drop in self-employment tax rate for 2011 should provide self-employed individuals with a little much-needed business tax relief.