Royalty income acceptable for IRA/SEP compensation?
A client is retired, under the age of 70.5, and his only income is royalty income from the sales of articles and books he writes/has written. His income comes to him on a 1099-MISC in Box 2 (Royalties). The CPA would like to take the income on the Schedule E as a Royalty income, deduct royalty expenses on it, and avoid paying self-employment taxes (FICA) on it (not show it on Schedule C).
If the CPA prepares his taxes this way, can the client contribute money to a TIRA/Roth/SEP utilizing this income? If so/if not, is the defining factor the nature of the income being Royalties, or is it because of paying FICA on it? Or is it some other factor?
Thank you!
Dave
Permalink Submitted by Alan - IRA critic on Fri, 2015-03-20 23:16
It is a matter of business vs non business royalities. Royalties are considered business income (Sch C) if writer was in the business of writing when the articles were written. Sch C would trigger SE tax and also to make an IRA contribution. If the books were written as a hobby, then the royalties are non business royalties and would be reported on Sch E and be considered investment income and not taxable compensation for an IRA contribution. Paying SE tax is a consequence of filing Sch C and the IRA contribution is a benefit of Sch C. If Sch E is filed, making an IRA contribution is not consistent with the nature of the income.