Author Topic: Tax Question: Earning Royalties Costs More Than It's Worth  (Read 9208 times)

oldtoyota

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Tax Question: Earning Royalties Costs More Than It's Worth
« on: January 30, 2014, 02:08:17 PM »
I got royalties from a book. It's not much. When we went to do the taxes, the 1099 with the royalties set off a flag in Turbo Tax and that meant we had to pay more money to use "more forms."

So, I get X in royalties. I pay tax on the royalties. Then, I have to pay Turbo Tax to fill out a form related to the royalties.

Based on the tiny amount of money, it seems to make sense to give up the royalties. What could I do here? Could the publisher donate them on my behalf so I don't have to fill out extra forms and pay money?

Also, can I just not cash the check if they do end up sending me future royalty checks??


sheepstache

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #1 on: January 30, 2014, 02:16:53 PM »
No on the not cashing the checks thing.  I mean, you can, of course :)  But the publisher will still have reported the income to the IRS, and that's what matters.

I would doublecheck that TurboTax doesn't think you're talking about oil or mining royalties.  I thought that book royalties just went on schedule C like any other self-employment income.

oldtoyota

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #2 on: January 30, 2014, 02:20:53 PM »
No on the not cashing the checks thing.  I mean, you can, of course :)  But the publisher will still have reported the income to the IRS, and that's what matters.

I would doublecheck that TurboTax doesn't think you're talking about oil or mining royalties.  I thought that book royalties just went on schedule C like any other self-employment income.

Thanks. I'll check on that.

the fixer

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #3 on: January 30, 2014, 02:21:40 PM »
Can you have TurboTax do the rest of the work for you, then you transcribe the forms to the IRS PDFs, toss in the tiny royalty amounts, then file that way?

MustachianAccountant

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #4 on: January 30, 2014, 02:43:16 PM »
Not cashing checks (as mentioned above) does nothing for you. Well, other than making your bank account smaller than it could be... :-)

I was going to answer this myself, but instead will link you to someone who already answered it:
http://www.bankrate.com/brm/itax/tax_adviser/20071011_royalties_tax_a1.asp
The relevant part:
***You generally report royalties in Part I of Schedule E (Form 1040), Supplemental Income and Loss. However, if you are in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Schedule C. The significant difference between reporting royalty income on Schedule C and Schedule E is that Schedule C income is subject to the dreaded 15.3 percent self-employment tax.

In order for royalties to be considered self-employment income, the recipient has to be considered regularly engaged in that business or profession. Revenue Ruling 68-498 provides the following example, which should help you contrast your situation:

"If an individual writes only one book as a sideline and never revises it, he would not be considered to be 'regularly engaged' in an occupation or profession and his royalties therefrom would not be considered net earnings from self-employment. However, where an individual prepares new editions of the book from time to time, and writes other books and materials, such activities reflect the conduct of a trade or business, the earnings of which would be subject to self-employment tax."***

You report on Sch E, which is KIND OF like Sch C except for rental property and royalties. So yes, you need a new form.

Solutions? Use a different program. I've heard good things about TaxAct.


oldtoyota

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #5 on: January 30, 2014, 07:28:42 PM »
Not cashing checks (as mentioned above) does nothing for you. Well, other than making your bank account smaller than it could be... :-)

I was going to answer this myself, but instead will link you to someone who already answered it:
http://www.bankrate.com/brm/itax/tax_adviser/20071011_royalties_tax_a1.asp
The relevant part:
***You generally report royalties in Part I of Schedule E (Form 1040), Supplemental Income and Loss. However, if you are in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Schedule C. The significant difference between reporting royalty income on Schedule C and Schedule E is that Schedule C income is subject to the dreaded 15.3 percent self-employment tax.

In order for royalties to be considered self-employment income, the recipient has to be considered regularly engaged in that business or profession. Revenue Ruling 68-498 provides the following example, which should help you contrast your situation:

"If an individual writes only one book as a sideline and never revises it, he would not be considered to be 'regularly engaged' in an occupation or profession and his royalties therefrom would not be considered net earnings from self-employment. However, where an individual prepares new editions of the book from time to time, and writes other books and materials, such activities reflect the conduct of a trade or business, the earnings of which would be subject to self-employment tax."***

You report on Sch E, which is KIND OF like Sch C except for rental property and royalties. So yes, you need a new form.

Solutions? Use a different program. I've heard good things about TaxAct.

Great info! Thank you.

The good news is that we have not yet paid for the extra form. Spouse says Turbo Tax charges us at the end--once we file.

I'll weigh the cost of using Schedule E in Turbo Tax versus the 15% + tax rate. The amount is teeny tiny, so the 15% might not be such a big deal (and might be cheaper than the cost of the form).

sheepstache

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #6 on: January 30, 2014, 08:04:53 PM »
Ahh, the ol' irregular income.

Are you sure Turbo Tax basic doesn't do it for free?  Sorry if you've already seen this a million times, but you can get Turbo Tax Deluxe for free by having a checking account with State Farm.  You can open it and keep it open for free with only $25.  We used Deluxe last year and the spouse had irregular so it's definitely included on that one.

Jamesqf

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #7 on: January 30, 2014, 08:38:38 PM »
Wouldn't it be a whole lot simpler to just not use TurboTax?

Nords

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #8 on: January 30, 2014, 09:30:12 PM »
Based on the tiny amount of money, it seems to make sense to give up the royalties. What could I do here? Could the publisher donate them on my behalf so I don't have to fill out extra forms and pay money?
You could tell your publisher to send the checks to a charitable organization of your choice.  For example, the Bogleheads Guides have signed over all their royalties to a 501(c)3 that's favored by Jack Bogle.  The publisher makes the royalty checks out to that organization and sends the payment directly to them.

The only drawback to this idea is that your publisher will probably only entertain your request once.  I doubt you'd be able to get away with asking them to send half it to one charity and half to another, or switch them to other charities next year.

I did Schedule C when I was receiving book royalties and blog income.  Now that I've divested myself of blog income, I plan to only report royalties on Schedule E.  Even if you run a business at receiving writing income, you have to make a profit at least three out of five years or the IRS declares it a "hobby"-- and takes away the deductions.

Also, can I just not cash the check if they do end up sending me future royalty checks??
Nope.  Two problems with that approach:
1.  The IRS says that you have control over the income once you receive the check.  You can elect not to cash it, but because you control that decision you're required to pay taxes on the income whether you actually turn it into cash or not.
2.  If the royalty amount is big enough, the publisher will send a 1099 to the IRS.  (By "big enough" I mean over $10/year.  This year I got a frickin' 1099 for less than $500 of royalties.)  The IRS computers will match your return to the 1099s that they receive from the publisher, so they'll expect you to report that 1099 on your return.

MustachianAccountant

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #9 on: January 31, 2014, 07:03:33 AM »
Even if you run a business at receiving writing income, you have to make a profit at least three out of five years or the IRS declares it a "hobby"-- and takes away the deductions.

Not entirely true. This is only one test of many that the IRS uses to determine if something is business or hobby income.

Poorman

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #10 on: January 31, 2014, 10:49:28 AM »
Wouldn't it be a whole lot simpler to just not use TurboTax?

Best idea in this thread.  TaxAct won't charge for the extra form like this.

oldtoyota

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #11 on: January 31, 2014, 11:19:25 AM »
Wouldn't it be a whole lot simpler to just not use TurboTax?

Best idea in this thread.  TaxAct won't charge for the extra form like this.

Duly noted. Thanks!

Evie

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #12 on: February 02, 2014, 11:44:07 AM »
Why don't you just do your taxes yourself?  Screw turbo tax. 

wtjbatman

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #13 on: February 02, 2014, 07:48:03 PM »
Why don't you just do your taxes yourself?  Screw turbo tax.

Isn't using Turbo Tax doing taxes for yourself? I always thought not doing your own taxes meant going to H&R Block or something. Having someone else prepare/file them. If you're inputting things into turbo tax you're still doing your taxes yourself, aren't you?

TaxAct user here, works wonderfully for me.

oldtoyota

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #14 on: February 03, 2014, 01:36:57 PM »
Why don't you just do your taxes yourself?  Screw turbo tax.

Isn't using Turbo Tax doing taxes for yourself? I always thought not doing your own taxes meant going to H&R Block or something. Having someone else prepare/file them. If you're inputting things into turbo tax you're still doing your taxes yourself, aren't you?

TaxAct user here, works wonderfully for me.

The question I wonder when buying Turbo Tax or Tax Act is why the gubment doesn't have the same thing on their website. If they can offer efile, why not the software to compute the taxes?

We got TurboTax for free this year, so that is why we're using it. I am willing to give Tax Act a try since it's also free.

Yes. I'd also thought using TT was doing my own taxes. Who knew it wasn't? ;-)

FIence!

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #15 on: February 04, 2014, 06:57:34 AM »
We used Deluxe last year and the spouse had irregular so it's definitely included on that one.

Looks like it is now more accurate to say it was included. I used TT deluxe last year without a problem too, this year when I went to file the program said that in order to get access to a schedule C I would need the $75 "home and business" version. F that. I hopped over to Tax Act, where the schedule C is included in the free version.

sheepstache

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #16 on: February 04, 2014, 06:07:47 PM »
We used Deluxe last year and the spouse had irregular so it's definitely included on that one.

Looks like it is now more accurate to say it was included. I used TT deluxe last year without a problem too, this year when I went to file the program said that in order to get access to a schedule C I would need the $75 "home and business" version. F that. I hopped over to Tax Act, where the schedule C is included in the free version.

Arrgh.  Thanks very much for the info.

Rural

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #17 on: February 05, 2014, 06:03:03 AM »
We used Deluxe last year and the spouse had irregular so it's definitely included on that one.

Looks like it is now more accurate to say it was included. I used TT deluxe last year without a problem too, this year when I went to file the program said that in order to get access to a schedule C I would need the $75 "home and business" version. F that. I hopped over to Tax Act, where the schedule C is included in the free version.

Arrgh.  Thanks very much for the info.

Looks like the online version of Deluxe no longer includes schedule C but the CD/ download version still does... for now: http://www.bogleheads.org/forum/viewtopic.php?f=2&t=127589

oldtoyota

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Re: Tax Question: Earning Royalties Costs More Than It's Worth
« Reply #18 on: February 05, 2014, 07:56:01 AM »
We used Deluxe last year and the spouse had irregular so it's definitely included on that one.

Looks like it is now more accurate to say it was included. I used TT deluxe last year without a problem too, this year when I went to file the program said that in order to get access to a schedule C I would need the $75 "home and business" version. F that. I hopped over to Tax Act, where the schedule C is included in the free version.

Arrgh.  Thanks very much for the info.

That is crazy.