Dear Tax Talk,
My husband is a full-time professor at a university. Several years ago, he was asked to help co-author the 12th edition of a well-established college textbook because one of the two original authors was retiring. He is now one of two authors for this textbook, which is revised every three years.
He has just completed co-authoring the 13th edition. He has no expenses -- just works long hours updating the original material (and supplying some original material of his own). This book, and its ancillary materials, is the only writing-for-profit that he does. The rest is all scholarly journal writing.
Can he report his royalty income, which he receives twice a year from the publisher, on Schedule E, or does he have to report it on Schedule C and pay self-employment tax? It's difficult for me to figure out: He's writing for profit on a regular basis, publishing updated editions every three years, but he is a full-time employee of a university that provides 80% of his income.
He doesn't consider himself in business for himself as a writer; he considers himself an employee of his university for his teaching job. Thanks for any clarification you can give. -- Nancy
Dear Nancy, As an author, your husband is considered self-employed and his royalties are subject to self-employment tax. They should be reported on Schedule C and Schedule E, Supplemental Income and Loss. While Schedule E, Line 4 provides a space to enter royalties, the instructions state the following:
Report on line 4 royalties from oil, gas, or mineral properties (not including operating interests); copyrights; and patents. ... If you are in business as a self-employed writer, inventor, artist, etc., report your royalty income and expenses on Schedule C or C-EZ.
The net earnings on Schedule C or C-EZ are subject to self-employment tax on Schedule SE. It doesn't matter that his writing isn't his full-time job in determining if the earnings are subject to SE tax. Assuming he's paid Federal Insurance Contributions Act, or FICA, tax on his wages, he may not owe much more in SE tax as there is an annual income cap on FICA tax from all sources. In 2011, the income cap is $106,800. He may then only owe the Medicare tax of 2.9%.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.