Do I qualify for self-employment tax?

[DIY_Tax_Person]

Each year, I pay about $1,000 in self-employment tax for what are essentially royalties from comedy /spoken word albums that I recorded over 20 years ago, but still generate income from SoundExchange (Pandora radio and Sirius/XM airplay) and income from a distributor (Tunecore) that collects revenue from sites like Amazon and iTunes. Both send me 1099-MISC tax forms at the end of the year.

However, according to Google, "Royalties are subject to self-employment tax only if they are earned as part of an active trade or business. If your royalties are business income, you report them on Schedule C and pay self-employment tax. If they are considered passive investment income—such as royalties from property you own but did not create yourself—they are typically reported on Schedule E and are not subject to self-employment tax."

Am I considered running an 'active business'?  I really don't do anything other than sit around and watch the income come in. 

[maglib]

@DIY_Tax_Person   EDITED according to the IRS they are generally considered ordinary income and are reported on Schedule E , depending on if the artist is self-employed or the income is passive. You can deduct expenses "ordinary and necessary" to produce this income including copyright registration, legal fees, commissions, professional fees, supplies, you can depreciate any capital assets you use, expense things like filing cabinets, even possibly an office in the home, other office expenses. The net amount is subject to Self Employment Taxes as when you earned it the nexxus is you were self-employed.

Royalties are non-passive under IRC § 469(e) and Treas. Reg. § 1.4692T(c)(i)(A). See also, Treas. Reg. § 1.469-2T(c)(7)(1). Royalty income should not be included on Form 8582 as passive income. There is a single exception in Treas. Reg. § 1.469-2T(c)(3)(ii)(E) that permits royalties to be treated as passive income. This exception is highly restrictive and rarely seen.

Good luck.  

[DIY_Tax_Person]

So, if it's considered passive income on schedule E, would I still expect to be paying the self-employment tax?

[DIY_Tax_Person]

In Turbotax, I went ahead and added this income instead as royalty income, and I deleted it as a self-employment business income. Indeed, the self-employment tax disappeared, yet oddly enough, my taxes went UP slightly! I was expecting my taxes to decrease by about $1,000 (with the self-employment tax gone). Why would that be? Is this because royalty income is treated as ordinary income, versus self-employment income being treated as a lower-taxed type of income (plus the self-employment tax). 

[maglib]

No. Passive income on Schedule C net is subject to SE taxes while Schedule E would not be  why taxes went up but, you should have taken related expenses against the income, no net loss allowed.. 

[maglib]

Did you take allocable expenses on your royalty income?

I can’t see your return so not much help on why. Depends on income, losses, other income. Are you subject to Net Investment Income Taxes, etc.  

Passive royalty income is generally taxed only at standard income tax rates (10%–37%), while self-employment (SE) income is taxed at standard rates plus a 15.3% self-employment tax (Social Security/Medicare). Passive royalties avoid the 15.3% SE tax, though they may be subject to a 3.8% Net Investment Income Tax

[AmeliesUncle]

I can't find the citation that I am looking for, but I am almost certain that if you were "in business" when the 'work' was created, any royalties from that is still considered as business income.

This isn't what I was looking for, but here is a clip from an IRS Audit Guide:

Self-Employment Tax Issues
(1) Songwriters are generally considered self-employed individuals. Situations may
exist where retired songwriters are receiving royalties from past works. The
taxpayer may no longer be active in the business but would still owe self-
employment tax on any royalties. There may be circumstances where a
songwriter is an employee such as when they perform all or most of their
songwriting services through an unrelated employer or through a closely held
and controlled corporation of their own.
(2) Although royalties may be reported on Form 1099-MISC as royalty income,
generally the income should be recognized as self-employment income on
Schedule C.

https://www.irs.gov/pub/irs-pdf/p5774.pdf#page=84

[maglib]

edited response.  Thank you.  Seems there can be many interpretations.  Some take Schedule E, others C. Based on link as I see no updated version, it is schedule C and net losses can not be utilized, except vs. other passive income.  That they are subject to SE taxes for the net income.