Residuals and royalties, self-employment tax, and passive income

[mhlester]

Hi, all,

Would like to confirm that an actor's residuals and a writer's royalties that are not reported on a W-2, but either not reported at all, or reported on a 1099-NEC or 1099-MISC, are self-employment income subject to self-employment taxes, and are reported as non-passive income on the tax return, despite the services having been performed in a prior year.

And what is the correct entry in Lacerte Sch. E for a film royalty... 1=nonpassive activity, or 2=passive royalty sheet 18, code 39), and should we check the box "Did not actively participate" directly underneath code 39?

Thanks, Michael

[Strongsilence-CPA]

are self-employment income subject to self-employment taxes,

I don't treat them as SE income.  Royalties are not SE. I don't have a cite.  

Code 2

"Did not actively participate" directly underneath code 39?

Don't check the box.  But review the return with and without it checked. I think that box is for RE professionals and other owners of real estate.

[qbteachmt · Accepted solution]

You can google:

are royalties subject to se tax

are film royalties subject to se tax

For example, read this, and you can find similar resources via the web:

https://www.thetaxadviser.com/issues/2013/dec/kelley-dec2013.html

Yes, it is subject to SE when it was the created property of the taxpayer, this is their business, and it is created for the purpose of sales and royalty income. Sched C.

No, it is not a business if you created one thing that sold (but wasn't created to be sold, such as art) or is generating income, but that is incidental and not your business operation. Sched E. Or, you bought the rights (creatively, you can buy a "catalog") and are leasing out the use for the income.

Think of oil and gas. If you are part of the development and production; or, have an interest in the success from being the surveyor, for instance, and you accepted a stake in the production instead of being paid at the time of services. Or, won that interest from gambling.

[msindc1]

Royalties from oil, gas, minerals, etc. AND from copyrights and patents go on Schedule E.

Royalties from work as a self-employed writer, inventor, artist, etc., go on Schedule C.

Work for hire--reported on a W-2--is treated like all W-2 income.

(Yours aren't, but when there are Schedule E royalties you have to make sure to select "royalties" from the type of property in screen 18.)

Micah

[msindc1]

Oops, I also meant to say that residuals are also Schedule C.

[mhlester]

Hi, Strongsilence-CPA,

Thank you for your reply.

I've been practicing for a very long time and for some reason, I have begun to question things I didn't realize I was not really clear about.

I think I will leave the field blank and not check the box. In this case, the amount is peanuts, so it's more of an academic issue than a real tax issue.

[mhlester]

Thank you very much, qbteachmt,

That site is very helpful, and your summary is great.

In this case, the taxpayer was in the business of creating property subject to residuals and royalties but is no longer active in the business and the income is paltry. I haven't filed a schedule C in years. Since the amount is not material, I will save this solution for an active situation.

[BobKamman]

@msindc1 Sometimes oil and gas royalties go on Schedule C, if the taxpayer has a "working interest."  Or something like that.  I have a client who receives both types of royalties -- some go on Schedule C, others go on Schedule E.  

[BobKamman]

 And to impress people at that après-4/15 cocktail party, here is the difference between residuals and royalties.

https://www.cnb.com/business-banking/insights/what-are-residuals.html#