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[afm_man]

So it wasn't a full blown audit, but a request for more information.  I would appreciate any help if you have experience in the area.

I am an editor for a journal.  Each year the journal pays about $2000 for this service.  Each year, I get a 1099-Misc for this.  Always mark it on my return under line 21. This year, I got a request for more information since I might be eligible for self-employment tax.  Calling the IRS is not a lot of use since they don't really give useful information.  They just tell me to reply to the letter (which I will).  I figure some of you who have royalty payments coming in might have faced this and I would appreciate information on how to respond.  Is this indeed self employment revenue?  I did pay normal income tax on this amount.

Don't need a response on this one, but I also got asked for more information on $6 for line 48 (foreign tax credit - from a 1099-Div form on a foreign stock).  They want me to fill out Form 1116 but the instructions say I do not need to since the total is less than $300 and it was a dividend.  Sheesh.

While I know I can go to a tax advisor/CPA, it really does not make any sense because even if I pay the tax (~$306), it is not worth the fight.

[pedanterast]

Well, that is for sure self-employment so I don't know why you would put it on line 21.  You definitely owe self-employment tax on it.  Sorry about that.  And yes, I am a CPA.  Editing is work, not royalty payments.  Royalty payments go to authors.  They go on Schedule E, not on line 21 of the 1040.

[prytania3]

But dude, if they want to tax you on self employment, then refile using a Schedule C.

I only have a certificate in accounting, but I don't like giving them one dime over what I owe.

Of course, that might be a lot of refiling.

[madhatter]

I had a request for information once in regards to a 1099 that had been issued for reimbursement of expenses. (An annoying habit of that particular organization.) I just wrote a letter back explaining why it wasn't personal income and said that I could provide documentation (receipts, etc.) if requested. The IRS said a follow-up letter saying the case was closed, and that was that.

[afm_man]

Well, that is for sure self-employment so I don't know why you would put it on line 21.  

Because that is where TurboTax put it.  It just asked for other income.  Doing taxes is like walking through a mine-field.  I guess I'll dump the software and hire a tax professional.

[pedanterast]

I don't know that you need a professional if it's $2k a year.  Just file a Schedule C and amend the returns for the past 3 years on Form 1040X.  They can't come after you for anything before that.  And once you do the Schedule C, you can reduce the $2k by any expenses related to it.  Kinda depends on how much your time is worth.

You can also tell the IRS you messed up and ask them to calculate the tax for you.  It'll be about $260 a year if you have no expenses, so you're looking at $780 and I doubt a tax professional would do three years of 1040X and Schedule C for that.

You might also try re-doing the Turbo Tax and explicitly stating it's self-employment income, and they will lead you through what expenses then might be deductible in connection with it.  Of course, Turbo Tax isn't perfect, but neither are tax professionals and neither is the IRS. 

And then as a consolation prize, anything you pay self-employment tax on then increases your Social Security pension.  Ever so slightly ....

[tee_bee]

Well, that is for sure self-employment so I don't know why you would put it on line 21.  

Because that is where TurboTax put it.  It just asked for other income.  Doing taxes is like walking through a mine-field.  I guess I'll dump the software and hire a tax professional.

Do that. I've saved far more in taxes than I spend on a CPA. Both my wife and I get a fair amount of schedule C income (me, book royalties on a textbook; her, free-lance art stuff). We make a lot of it go away by legitimately claiming some expenses like cell phone, etc., as pry suggests above. FWIW, we never claim the home office--that's total audit bait.

For every $ you take off the 1099 income, that's a dollar you don't have to pay SE tax on.

On review: pedanterast is right if you don't routinely get the payment. And the 1040X idea is a winner.

Also: I once got a request for information--sort of like an audit--basically because we forgot to include a W2 for my wife's substitute teaching that year. But in the course of remedying our legit debt, which the IRIS pegged at over 1000 bucks, my CPA found something we hadn't claimed before, filed the 1040X and a state equivalent, and the result was that I only had to pay the feds about $150 and got back about $50 from the state. I <3 my CPA.

[pedanterast]

Again, book royalties go on Schedule E, not Schedule C.  That's because you have "basis" in the creation of the intellectual property.  The home office deduction is not only audit bait but gets you into a huge boondoggle if you sell.  You can't take the capital gains exemption on that part of the house, you run into "recapture" and it ends up being the Accountants' Full Employment Act I have spoken of earlier.

In general, if you get a 1099, it's self employment income and the IRS has greatly "enhanced" their ability to track that in recent years.

[pedanterast]

Digging into this a bit more, the OP is definitely in a Schedule C situation but I may be wrong in TB's case.  That tax law's been changed a bunch of times and I'm not finding much specific to the situation of text book authors who don't have on-going expenses once the book is written and sold.  You'd want it to be Schedule E, all else equal, because that avoids self-employment tax.  But, it doesn't seem logical an author should be able to avoid this.  Let me dig a bit further.

[afm_man]

So I went back to TurboTax and set it up as income.  It increased my taxes by $70 because I had travel on schedule C already to offset it (once I moved it to against the income).

I should explain that I had a CPA do my taxes for the last 3 years previously.  I had rental income and just did not want to track all the depreciation (it got really confusing to me when we had to put on a new roof and air conditioner since some things depreciate over 25, 15 and 7 years - may not be the right years but you get the picture).  I'll have to go back and look at those returns but I assume they are OK.

Just bad timing to try my own hand at doing this.

[tee_bee]

Again, book royalties go on Schedule E, not Schedule C.  The home office deduction is not only audit bait but gets you into a huge boondoggle if you sell.  You can't take the capital gains exemption on that part of the house, you run into "recapture" and it ends up being the Accountants' Full Employment Act I have spoken of earlier.

Hmm. My CPA always puts it on Shed C. I thought E was for things like royalties from, like, mineral rights or something. Indeed, "Royalties received through the use, manufacture, or sale of a patented article, or an investment in a mineral operation, such as a gas and oil limited partnerships are reported on Schedule E," according to http://www.winepressofwords.com/2011/01/how-to-report-book-sales-royalties-on-your-tax-return/

Oh, well. My CPA will sort it out if necessary--and I will mention it to him, since pedanterast usually has a good grip on these things. I will say I've been reporting books and other misc income on C for years, without any problems. Knock on wood (veneer).  And, yes, he did warn me about the home office deduction. There's a building near me renting one-room offices for $400 month--that would be easier to deal with than a home office, although I hardly need another one.

Fascinating discussion at http://www.professorbainbridge.com/professorbainbridgecom/2010/09/so-why-are-my-scholarly-book-royalties-reported-on-schedule-c.html

On review: thanks p'ast. And I see what you're saying there--the goal is to avoid SE tax on E. I think that might be troublesome. But I will definitely talk to my CPA about this, because going to E would save me a lot of SE tax. And, according to the professorbainbridge site, the way I deduct expenses might be a bit sketchy. I've got a lot of thinkin' to do.

[pedanterast]

Blah.  Very complicated.  Appears to depend on whether you wrote the book to "fulfill employer's expectations of research" vs. whether you did it as a discrete project on your own.  Looks like C either way but what gets expensed vs. capitalized looks really icky.  Also looks like after one law that clarified how fast you could expense the creation expenses was repealed, leaving nothing in its place, the IRS "took a position" that has been challenged a couple of times.  One really sucky thing about US taxes is that the ultimate answer can depend on a Circuit Court decision and so might vary from one state to another, even though it's federal tax.

TB's CPA's experience is probably more current than mine on this one. 

[afm_man]

 according to http://www.winepressofwords.com/2011/01/how-to-report-book-sales-royalties-on-your-tax-return/


Fascinating discussion at http://www.professorbainbridge.com/professorbainbridgecom/2010/09/so-why-are-my-scholarly-book-royalties-reported-on-schedule-c.html

These links answered my questions.  I did it wrong, but it will be an easy fix... This time.  At least I don't have to deal with state taxes. Thanks both of you.