Are annual royalties from a previously published book automatically excluded as earned income for SEP contribution purposes? Does it matter whether the person is currently an author by profession? Where would I find the references?

Thanks!!

Try IRC 401(c)(2)(C), and Revenue Ruling 68-498.

In general - Pub 560; Compensation is the pay a participant received from from a business in which your services materially helped to produce the income. .. You can also have earned income from property your personal efforts helped create, such as from royalties from books or inventions.

Thanks much.

Now to add one more level of complexity to this issue:

Is it absolutely essential that the income be reported on Form SE as self employment income and that the self employment tax be paid in order to properly use the income as a basis for the SEP contribution? I believe the individual has claimed the royalties as supplemental income on his tax return.

If the individual has improperly made a SEP contribution, any suggestions on how to clean this up? Would it be possible to go back and amend his tax returns and complete the Form SE and, of course, pay the self-employment tax?

Thanks again for any light you can provide.

Unfortunately, it sounds like he has to ammend to include as SE income (which is also taxed differently).

I have a question that is similar to the above.

I am an inventor that receives royalties for ideas and inventions. I am not an occasional inventor: It is my livelihood. I do not buy ideas and patents to resell. Everything I sell are mine.

I expect to pay self employment taxes on royalties. This is not a problem. The issue is that my royalty stream is payment for "assignment" of my patent rights. In essence, it's a sale not a license. The IRS provides special treatment for sale of IP in that the royalties are taxed at long term capital gains rates. Given all this, is my royalty income "earned income" which allows me to open up a SEP or Simple 401 (k)?

How do you report it on your tax return? What form or schedule?

I report income and expenses on Schedule C

IRS Publication 560, page 4, definition of "earned income". http://www.irs.gov/pub/irs-pdf/p560.pdf

Unless you're filing some other form or schedule related to your royalty income, then generally speaking, net income on Sched C is net earnings for an SEP.

Note: (pg 4 of the pub) You can also have earned income from property your personal efforts helped create, such as royalties from books or inventions. Earned income includes net earnings from selling or otherwise disposing of the property, but it does not include capital gains. It includes income from licensing the use of property other than goodwill.