Is Royalty Income Subject to Social Security Tax?

The oil comes in -- and some of your money may go out as Social Security tax.

The oil comes in -- and some of your money may go out as Social Security tax.

You can receive royalties for leasing out mineral rights on your land, writing a book that sells well, or from patenting and marketing an invention. Royalties are taxable income and you may also have to pay Social Security tax on them. It depends on whether your royalties come from your main business or just a sideline.

Schedule E or C

When you write a book or lease out your land to an oil company, you report the royalties on Schedule E, for supplemental income or Schedule C for self-employment tax. If you report the money on Schedule E, you pay income tax but not Social Security tax. If you report your money on Schedule C, you pay Social Security and Medicare tax in the form of self-employment tax. You may have to pay self-employment tax even if you don't make enough to pay income tax.

Self-Employment Tax

If you work for yourself, you have no boss to take out Social Security and Medicare taxes from your paycheck or to contribute a portion of the tax for you. Self-employment tax is how you make up for that: as of 2012 it equals 13.3 percent of your net self-employment income. Even if your net income from royalties -- or any other business income -- is only $400, you have to pay the tax. If it's less than that, you're off the hook.

How You Tell

When you report royalties on Schedule E, you're saying to the IRS that whatever you did was a one-time deal. You wrote a book, for instance, but you don't consider yourself a professional author; you sold a mineral lease, but you're not in the oil business. If, on the other hand, you work consistently as a writer, publishing multiple works and turning a profit, you use Schedule C. With oil or gas royalties, you use C if you form a business partnership with whoever you lease your mineral rights to.


Royalty income doesn't automatically translate into Social Security or income taxes: you deduct any related losses or expenses on whichever schedule you use. On Schedule E you roll royalty income and losses in with losses and gains from any rental real estate you own. On Schedule C, you get to deduct all your business losses: If you earn $500 in royalties but spend $300 working on other writing projects, you end up with $200. That's too low to pay self-employment tax.


About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

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