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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.

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