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Are royalties as a retiree subject to self employment tax?

Retiree earns $45,000 from music royalties – are these considered earned income? It depends.

First, let’s examine what royalties are. Royalties proceeds from the sale of intellectual property are considered earned income. An author/creator of work may receive extended (sometime lifetime) royalties from the result of their personal service.

Occupation matters

There are exceptions where royalties from creative work is not subject to self-employment tax. This happens where creating the intellectual property is incidental and not typical for the taxpayer profession. For example. a math teacher who once published a book of poetry will report royalties on sch E. If he had published a math tutorial then royalties would be self-employment income.

This is why TP occupation field is so important.

In the case of a retiree, we must examine what their occupation was in their younger years to determine whether they constitute self employment. In the case of the taxpayer, were he a journalist in the past, then the royalties would be self employment.

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