Full-time attorney with part-time writing royalties - tax ?s

[Nick_Miller]

I work full-time as an attorney (I'm an employee, not a contractor) and earn (this year) roughly $100K per year, including bonuses.

As a creative side project, I wrote a book 2 years ago. I started earning royalties in Feb, 2016. Royalties for this year will likely be in the $12K-$15K range. I get a monthly check.

I upped my federal and state withholdings to compensate for next year's taxes that will be owned on the royalties. That should be a wash.  In fact, we'll probably get a largish return.

But when do I need to start reporting my royalty income quarterly? Next year? For this first year, I thought I would be okay since I wasn't clear if I'd even earn any royalties (my book's small success was a surprise) and I had no track record of earning self-employment income.

When do I pay Social Security taxes, etc? If I hit the SS cap through my full-time job, does that exempt me from being SS taxes on my royalties? How does it all work together?

I am sitting down with an accountant in a few months but I just figured I'd go into the meeting as prepared as possible. I've had a hard time finding guidance online for situations where the self employed person earns most of his/her money from a regular job.

[NoStacheOhio]

Reporting only happens at the end of the year, though some people pay estimated quarterly. If you have W-2 wages, adjusting your withholding to account for the additional tax liability is generally acceptable instead of paying quarterly. You can file the income under 1040 Schedule C alongside your regular W-2 income.

This has a lot of the info you're looking for toward the bottom: https://www.irs.gov/publications/p17/ch04.html

[Lake161]

My book didn't do quite as well as yours, but I handled it by tweaking my salary witholdings and never had to pay estimated taxes.

Now that I'm FIREd, I do an estimate on my royalty, dividend and capital gains income at the beginning of the tax year, and file estimated state and federal taxes quarterly.

[SeattleCPA]

You don't need to worry too much about the estimated taxes. You'll maybe owe $3K in income taxes on the income and you'll want to have that available when you file your return. But that's about it.

FYI, you may be able to treat the writing income on Schedule E as royalty income and not on Schedule C as an active trade or business if this is first book and you're not going to continue writing. That'll save you from self-employment taxes. BTW if you aren't at $118,500 in box 3 on your W-2 and you treat this as a business and not as a royalty deal, you won't owe SS and MC but the equivalent 15.3% self-employment taxes.

[Nick_Miller]

Wow I really appreciate all the information. I feel better about the meeting now and I'll definitely check out that link.

Yeah I don't really get the distinction the IRS apparently makes between royalty income and active writing income. That seems like hair splitting to me. How long does someone have to stop writing before they are no longer active? As any writer knows, you may have long periods of no writing activity due to time constraints or writer's block or whatever, but in 3 months you might reach for your file again. But honestly, yes I am "actively writing" a sequel - can't deny it - and hope to have it published in 2017 so I guess I'm in that second category.

Back in January, I increased my withholdings at work about $300 federal and $150 state per month so I think that will almost perfectly wipe out tax liability on the royalties.

And Lake161, congrats on getting a book published! Most people seem to get sidetracked, which is understandable, but it's awesome whenever someone gets to the finish line.

[SeattleCPA]

Regarding active vs passive, it's pretty wishy-washy. But if you only do one book (you were the president and you wrote your memoirs) you're probably active.

BTW, because it may add comfort or context... I've written a bunch of books. My best-sellers were Quicken for Dummies and QuickBooks for Dummies.

[Nick_Miller]

BTW, because it may add comfort or context... I've written a bunch of books. My best-sellers were Quicken for Dummies and QuickBooks for Dummies.

That is awesome!

And yeah it's nice knowing that you've walked the walk.

I don't want to threadjack my own thread, but I'm super curious about how you managed to write under the "Dummies" label. I guess they take submissions for topics from subject matter experts, and those experts get the exposure and "Dummies" name brand recognition?

[NoStacheOhio]

You don't need to worry too much about the estimated taxes. You'll maybe owe $3K in income taxes on the income and you'll want to have that available when you file your return. But that's about it.

FYI, you may be able to treat the writing income on Schedule E as royalty income and not on Schedule C as an active trade or business if this is first book and you're not going to continue writing. That'll save you from self-employment taxes. BTW if you aren't at $118,500 in box 3 on your W-2 and you treat this as a business and not as a royalty deal, you won't owe SS and MC but the equivalent 15.3% self-employment taxes.

Duh, forgot royalties were on a separate schedule.

I think it also depends on how the publisher reports the income. I end up filing so much paperwork at the end of the year I lose track of what goes where. I've had years with stock photo royalties, book royalties, self-employment and wage income.

Having a solid accountant is really helpful.

[SeattleCPA]

...But if you only do one book (you were the president and you wrote your memoirs) you're probably active.

I didn't see this when I first posted, but the above statement is wrong. If you only do *one* book, e.g., like the president, you're probably inactive... which is the same thing as saying probably passive.

Sorry.

Also, to answer Nick's questions, I had written a bunch (and actually the first book on Quicken, "Using Quicken" published by Que) when the publisher of the new-at-the-time "Dummies" series asked me to write a Quicken for Dummies book. It was a right-time, right-place opportunity.