Tax Court books author's royalty income as subject to self-employment tax

When popular crime author, Karin Slaughter, signed her first publishing contract in 1999, she was not a “brand author” and her royalty income was modest. Ms. Slaughter worked to establish herself as a brand author by hiring a media coach, meeting with publishers, agents and media contacts, establishing a good relationship with booksellers, and using social media, websites and newsletters to connect with her readers. Now as a brand author, her typical advance has grown eightfold, yet the amount of time spent writing a book has stayed about the same. Ms. Slaughter, therefore, attributes the increase in earnings to building her brand and not to her actual writing.

In preparing her income tax returns, Ms. Slaughter reported all advances and royalties on Form 1040, Schedule E. Using a calendar-based approach, she subtracted the portion of her income related to the trade or business of writing from Schedule E and reported it on Schedule C. She calculated self-employment tax only on the net Schedule C amount. In this manner, Ms. Slaughter allocated her earnings attributable to writing as subject to self-employment tax and all other earnings as attributable to the intangible asset of her brand, which were not subject to self-employment tax.

The Tax Court ruled¹ that earnings from Ms. Slaughter’s brand were subject to self-employment tax given that she was engaged in developing her brand with continuity and regularity for the primary purpose of income and profit. Her brand and her writing combined were monetized, first by selling books and second, by providing the leverage to negotiate for higher advances and royalty rates.

Further, the ruling having all income subject to self-employment tax was influenced by the manner in which Ms. Slaughter deducted her expenses. Ms. Slaughter did her writing in Georgia but rented a New York City apartment to facilitate meetings and conferences with agents, publishers and booksellers. Ms. Slaughter deducted the rent for the apartment and her advertising costs on Schedule C even though she asserted that Schedule C was for her earnings attributable to writing. The Court reasoned that if brand-related expenses, like rent and advertising, are Schedule C trade or business expenses, then the income derived from the brand to which the expenses relate is also trade or business income subject to self-employment tax.

The way expenses are reported on an income tax return impacts both income tax and self-employment tax.

Contact me for advice regarding reporting of income and expenses or for advocating a position challenged by the IRS.

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

Client alert authored by: David B. Shiner, Principal