Blue Ridge ESOP Associates
(Charlottesville VA / Telecommute)
Retirement Plan Consultant
Cetera Retirement Plan Specialists
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|Question 150: I have a professional corporation, which has two sources of income: (1) about $100K income from my professional services, and (2) about $20K royalty income from a book I wrote. My accountant has advised to have my publisher pay me separately, as a sole proprietor, for the royalties, so as to avoid Medicare taxes on the royalty income. Because the sole proprietorship will be under common control with my corporation, will this change my compensation for plan purposes?|
Answer: Unless you have substantial other income, yes.
The treatment of royalties can be tricky. How you treat them can have significant retirement plan consequences. The central issue is whether the royalty income derives from a trade or business.
Revenue Ruling 68-498 says:
If, as your accountant suggests, the royalty income would be exempt from employment tax, you may still have earned income for retirement plan purposes. IRC §401(c)(2)(C) provides that income from the sale of property created by the author are earned income, whether or not they are net earnings from self-employment. Thus, you can have your cake and eat it too.!
I discuss issues relating to earned income and other issues affect self-employed individuals in Chapter 1 of my book, Who's the Employer. A special thanks to fellow author Gary Lesser, who pointed out the Revenue Ruling cited above.
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.
The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.