Are royalties from online publishing considered earned or unearned income?
Royalties may be classified as either business or nonbusiness income. Individuals engaged in the trade or business of writing, performing, or inventing report royalty income as business income. Whether an individual is engaged in a trade or business must be determined on the basis of all the facts and circumstances of a particular case. Gross income derived by an individual from any trade or business includes income received in the tax year from a trade or business, even though such income may be attributable solely to services rendered in a prior tax year. Therefore, the proper tax treatment for royalty income is determined by when the creative activity resulting in the royalty occurred.
The IRS has ruled that an individual who writes only one book as a sideline and never revises it is not regularly engaged in an occupation or profession, and the book royalties are not considered earnings from self-employment. However, preparing new editions of the book and writing other books and materials reflect the conduct of a trade or business. Thus, a full-time professor who co-authors a textbook and does not engage in any other commercial authorship work while writing the textbook and has no obligation to work on future editions is not engaged in a trade or business. Even though an individual is retired and not currently involved in his or her creative pursuit of income, any royalties received are business income if the individual was engaged in the business at the time the material generating the royalties was produced. In summary, royalty income should be classified as business income for individuals who were in the business at the time the intellectual property was created.
Thanks for your answer. More involved than I imagined.
So if my dependent child tries their hand at online publishing on Amazon, creates a single book only, and receives royalties from that one book, then it is NOT considered earned income? But if they create two books (or several, I don’t know what the cutoff is), and they receive royalties from only one book, then that is considered earned income?
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