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.
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.
Whole Story at TFX.