You can receive royalties income 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.
When Royalty Income is Taxable
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 book earnings on Schedule E, for instance, 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. 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.
Royalty Income Exceptions
Whether you report royalties income depends on how much you made. As with any self-employment form of income, as long as your total income for the year is less than $400, you don't have to pay taxes on it. Once you reach $400, though, you'll begin to be subject to self-employment tax. 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 subject to self employment tax but spend $300 working on other writing projects, you end up with $200. That's too low to pay self-employment tax.
2018 Self-Employment Taxes
The amount you'll pay in self-employment tax varies from one year to the next. Under 2018 tax laws, 15.3 percent of your earnings will be withheld. That's 6.2 percent for Social Security, 1.45 percent for Medicare, 6.2 percent for what would typically be an employer contribution to your Social Security and 1.45 percent that would normally be your employer's contribution to your Medicare. If you believe your self-employment income, including royalties, will be significant, it might be worth paying estimated quarterly taxes, since that can help you avoid penalties for underpayment during the year.
2017 Self-Employment Taxes
Not much has changed for 2018 when it comes to self-employment tax. You should have paid 15.3 percent of your royalties income toward self-employment tax in 2017, just as you will in 2018.
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.