Categorizing copyright lawsuit settlement money for a self-employed artist

[taxi2020]

For a sole proprietorship artist who earned money from a copyright lawsuit: is the settlement money taxed as ordinary income or as self-employment income? (I.e. will pay just the normal income tax rate on it or, additionally, the self-employment tax?)

[Opus 17]

Settlement income is taxed according to the type of income it replaces.  This seems to be a complicated area of law that I am not expert it.  There is an article here, but I can't vouch for its accuracy.

https://www.thetaxadviser.com/issues/2013/dec/kelley-dec2013.html

Boiling it down to its essence, if you are a working artist, this is business income.  But, depending on what work was done, and when, this might or might not be self-employment.  If someone used your images or other creations without permission, then I assume the settlement would be in the nature of royalties for a useage license, rather than transferring the property to them completely.  In that case, the settlement would be treated as royalties and taxed accordingly.   If you don't already understand how to pay taxes on royalties, the article may have some useful perspectives. 

[taxi2020]

Thanks for the link/info. and for your time! 

(I'm a working/self-employed artist--though all my income is in the form of royalties--and the settlement consists of damages for lost revenue due to copyright infringement, so I'm guessing this will be business income?!)

[Mike9241]

i would say this, if the settlement is to reimburse you for lost revenue, it would be taxed in the same manner as revenue from the copyright.  however, if there are punitive damages, they would be taxable but not subject to SE tax in my opinion

[taxi2020]

Thanks! The final judgment calls them "statutory damages." I don't see anything about punitive damages in the settlement.

[Opus 17]

---

@taxi2020 wrote:

Thanks! The final judgment calls them "statutory damages." I don't see anything about punitive damages in the settlement.

---

It all depends on the order.  Sometimes there are actual damages plus punitive damages (punishment that is more than just restitution). Sometimes there is interest tacked on if the award is delayed.  Any punitive damages would be business income but not SE income, interest would be interest income.  I think the main damages are royalties--whether royalties are subject to SE tax is something I don't know but you may already know, or it is in the article, or you can ask a local expert. 

[rjs]

Royalties earned by a self-employed artist for works that she created herself are business income. The royalties are reported on Schedule C and are subject to self-employment tax.

You could ask the lawyer who handled the lawsuit for you to clarify the meaning of "statutory damages." But keep in mind that a copyright lawyer is probably not an expert in tax law.