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american887
Returning Member

Are Royalties Earned Income for Roth IRA Contributions?

Hi, I'd like to contribute the maximum of $6,000 to my Roth IRA for the year 2020 before the April 15th deadline. However, I want to make sure I have enough earned income, as I'm not an expert but I know you can only contribute earned income to it. By making and uploading YouTube videos I made well over the $6,000 threshold in 2020, even after subtracting business deductions and the deduction for 1/2 of the self employment tax. I don't have any deductions for contributions to other retirement plans. Some of the income was from videos from prior years that continued to accumulate ad-revenue, however I was still actively uploading as well.

 

However, YouTube recently reclassified the earnings as "Royalties". I received a 1099-NEC for the income and it was listed under box 1 as "Nonemployee Compensation". Does it still count as earned income? And should I still pay self-employment taxes on it?  I made YouTube videos actively in 2020 so I think they should be taxed as self-employment income and count as earned income for the Roth IRA, but I'm not 100% sure. Can I contribute the max to the Roth IRA for 2020?

 

Also, when calculating earned income, it is pre-tax, correct? Aside from the deduction for 1/2 of the self employment income.

 

Thanks!

12 Replies
DavidD66
Employee Tax Expert

Are Royalties Earned Income for Roth IRA Contributions?

You can contribute the amount of your earned income to your IRA.  This would be wages on line 1 of Form 1040 and Line 3 of Schedule 1, Form 1040.  If your income reported by YouTube on Form 1099-NEC was in Box 1, it goes on Schedule C as self-employment income.  Royalties are reported on Form 1099-MISC, Box 2.  Royalties are not earned income and don't qualify for an IRA deduction.  As for pretax, it is gross earnings as shown on Form 1040. not taxable income.

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macuser_22
Level 15

Are Royalties Earned Income for Roth IRA Contributions?

Royalties is money from property, but not money that you work for so would not be compensation for an IRA.

 

Per the IRS

 

What Is Compensation?
Generally, compensation is what you earn from working.
For a summary of what compensation does and doesn’t
include, see Table 1-1. Compensation includes all of the
items discussed next (even if you have more than one
type).
Wages, salaries, etc. Wages, salaries, tips, professional
fees, bonuses, and other amounts you receive for providing
personal services are compensation. The IRS treats
as compensation any amount properly shown in box 1
(Wages, tips, other compensation) of Form W-2, Wage
and Tax Statement, provided that amount is reduced by
any amount properly shown in box 11 (Nonqualified

plans). Scholarship and fellowship payments are compensation
for IRA purposes only if shown in box 1 of Form
W-2.

 

What Isn’t Compensation?
Compensation doesn’t include any of the following items.
• Earnings and profits from property, such as rental income,
interest income, and dividend income.
• Pension or annuity income.
• Deferred compensation received (compensation payments
postponed from a past year).
• Income from a partnership for which you don’t provide
services that are a material income-producing factor.
• Conservation Reserve Program (CRP) payments reported
on Schedule SE (Form 1040), line 1b.
• Any amounts (other than combat pay) you exclude
from income, such as foreign earned income and
housing costs.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
american887
Returning Member

Are Royalties Earned Income for Roth IRA Contributions?

I'm confused. They're considering it royalties, but it was reported on 1099-NEC box 1 as nonemployee compensation. If I have to report this as self-employment income with Sched C, isn't it earned income? And aren't royalties earned income if you worked for them?

american887
Returning Member

Are Royalties Earned Income for Roth IRA Contributions?

Aren't royalties earned income if you actively worked for them?

macuser_22
Level 15

Are Royalties Earned Income for Roth IRA Contributions?

Each time you get a royalty payment do you have to go do some new work for it?   Royalties can be ongoing payments for "past" work.  People can inherit royalties but they do not work for it.

 

Interest and dividends on investments are not compensation either but you had to work for the money to invest.

 

The IRS does not use the term "earned income" it is "Taxable Compensation".  Compensation

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
american887
Returning Member

Are Royalties Earned Income for Roth IRA Contributions?

I'm paid monthly for them regardless, but I have to actively work to put up videos and I did this roughly weekly in 2020. If I stopped, the revenue would decrease and the views would decline. Shouldn't I pay self employment on it, and therefore it's earned income/taxable compensation?

macuser_22
Level 15

Are Royalties Earned Income for Roth IRA Contributions?


@american887 wrote:

I'm confused. They're considering it royalties, but it was reported on 1099-NEC box 1 as nonemployee compensation. If I have to report this as self-employment income with Sched C, isn't it earned income? And aren't royalties earned income if you worked for them?


You said a 1099-NEC box 1, According to the IRS Royalty payments are reported on a 1099-MISC form box 2.   (Self-employment pay is reported on a 1099-NEC, not Royalties).   

 

It sounds like the 1099 is in error and not reported properly. 

 

 

 

NEC box 1 means:

 

Box 1. Nonemployee Compensation
Enter nonemployee compensation (NEC) of $600 or more.
Include fees, commissions, prizes and awards for services
performed as a nonemployee, other forms of compensation
for services performed for your trade or business by an
individual who is not your employee, and fish purchases for
cash. Include oil and gas payments for a working interest,
whether or not services are performed. Also include
expenses incurred for the use of an entertainment facility that
you treat as compensation to a nonemployee. Federal
executive agencies that make payments to vendors for
services, including payments to corporations, must report the
payments in this box. See Rev. Rul. 2003-66.
What is NEC? If the following four conditions are met, you
must generally report a payment as NEC.
• You made the payment to someone who is not your
employee.
• You made the payment for services in the course of your
trade or business (including government agencies and
nonprofit organizations).
• You made the payment to an individual, partnership,
estate, or, in some cases, a corporation.
• You made payments to the payee of at least $600 during
the year.

 

See 1099 MISC/NEC instructions page 5.

https://www.irs.gov/pub/irs-pdf/i1099msc.pdf

 

Box 2. Royalties
Enter gross royalty payments (or similar amounts) of $10 or
more. Report royalties from oil, gas, or other mineral
properties before reduction for severance and other taxes
that may have been withheld and paid. Do not include
surface royalties. They should be reported in box 1. Do not
report oil or gas payments for a working interest in box 2;
report payments for working interests in box 1 of Form
1099-NEC. Do not report timber royalties made under a
pay-as-cut contract; report these timber royalties on Form
1099-S, Proceeds From Real Estate Transactions.
Use box 2 to report royalty payments from intangible
property such as patents, copyrights, trade names, and
trademarks. Report the gross royalties (before reduction for
fees, commissions, or expenses) paid by a publisher directly
to an author or literary agent, unless the agent is a
corporation. The literary agent (whether or not a corporation)
that receives the royalty payment on behalf of the author
must report the gross amount of royalty payments to the
author on Form 1099-MISC whether or not the publisher
reported the payment to the agent on its Form 1099-MISC.

 

 

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
macuser_22
Level 15

Are Royalties Earned Income for Roth IRA Contributions?


@american887 wrote:

I'm paid monthly for them regardless, but I have to actively work to put up videos and I did this roughly weekly in 2020. If I stopped, the revenue would decrease and the views would decline. Shouldn't I pay self employment on it, and therefore it's earned income/taxable compensation?


You are confusing terms.   What you just posted is NOT royalties at all.    It is payment for work done and is self-employed income subject to the SE tax and IS taxable compensation that can be used for IRA contributions.   That has NOTHING to do with royalties whatsoever.

 

Royalties can only be reported on a 1099-MISC line 2.

 

 

 

 

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
american887
Returning Member

Are Royalties Earned Income for Roth IRA Contributions?

They only announced the change to royalties in November 2020. Perhaps it's just because it wasn't in effect for most of 2020?

 

Anyways, is the bottom line that I can contribute them to the Roth IRA? And pay SE taxes on them?

macuser_22
Level 15

Are Royalties Earned Income for Roth IRA Contributions?

If it is taxable compensation on a 1099-NEC and you pay the SE tax and report is as self-employed income then yes.

 

To actually be a royalty (for tax purposes)   takes more than just "calling" it a royalty - it must be reported as such.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
american887
Returning Member

Are Royalties Earned Income for Roth IRA Contributions?

Is nonemployee compensation considered taxable compensation for Roth IRA purposes? I would still get payments monthly if I stopped making videos, but they would decrease because of the decrease in views and overall interest to the channel. Regardless, I was actively uploading videos in 2020. 

macuser_22
Level 15

Are Royalties Earned Income for Roth IRA Contributions?

Non employee compensation is defined as work performed during the tax year by a business (your) to provide services to another business (the one that pays you) .  You must report non-employee compensation on a 1040 Schedule C, and pay the SE (16.3% Medicare and Social security tax) for the work preformed during the tax year.    On Schedule C you can deduct your expenses (materials, supplies, etc) that were necessary to preform the work.   It cannot report payment for any work preformed in a prior year.

**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**

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