Is Royalty Income Subject to Social Security Tax?
The IRS collects Social Security taxes from wage earners and the self-employed. The tax amounted to 4.2 percent of gross wages as of the time of publication, while employers kicked in another 6.2 percent. If you are self-employed, you paid both employee and employer share through self-employment taxes. If you received royalty income, then you may have to add it to income taxable for Social Security benefits. It all depends on what kind of royalty income you earn.
If you receive royalties as a creative artist, such as a writer or cartoonist, then you are earning income from self-employment that you must declare to the IRS on Schedule C. After deducting expenses, you carry the net income amount over to Schedule SE to figure your self-employment taxes. SE tax is payroll tax for those who don't earn their income from wages, and it goes toward the work credits needed for Social Security retirement and disability benefits.
If you earn royalties from rentals or real estate, or from business partnerships, that is non-wage income declared on Line 17 of Form 1040. It is added to your adjusted gross income amount, which appears on Line 37. After taking allowable deductions and exemptions on this amount, you end up with net taxable income, on which you pay income tax according to the IRS tax tables. This is not the same as Social Security tax, which comes directly out of your wages, is not deductible, and which does not figure into the income tax calculation.
Active and Inactive
The IRS makes an important distinction between active and inactive employment. If you are not otherwise engaged in the trade in which you are generating royalties, then you don't owe self-employment tax on the royalties. This is passive income, like dividends or interest on investments. A writer who collects royalties from a book written five years ago, but who is not earning any money from the profession in the current year, is earning passive income. The IRS does require you to declare income on royalties received from operating oil, gas or mineral interests on Schedule C as well as Schedule SE for self-employment taxes.
Reporting Minimums and Wage Base Limits
The IRS requires you to report all self-employment income -- royalty and otherwise -- of $400 or more. Social Security taxes were capped at $110,100 of income at the time of publication, whether or not you are earning that money from self-employment. This was the "wage base limit," above which the IRS does not collect Social Security taxes. (The threshold rises every year.) Medicare taxes, however, remain due on all income, no matter how much you earn.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.