Clever titles aside (the very popular author’s name is Karen Slaughter), there is a lot to learn from her unfortunate Tax Court case. As an author, she made money from the sales of her books. But a popular author has more than just books to sell. They sell their brand. If you buy a Stephen King novel (horror) you have a sense of what you’re going to get. It will be different than a Nora Roberts book (romance). Karen Slaughter’s particular brand is mysteries and thrillers.
She challenged the IRS in a way that gives us all a road map for how we take define royalties. Ms Slaughter claimed that a large portion of the money she received from publishers (from the sale of her books) was a return on her investment into her name, likeness and brand. In other words, it wasn’t just the sale of a book. It was a sale of a book because of who Karen Slaughter was.
There is one big reason why that matters.
If you work, the income you make is considered earned income. If you write copy for a website, that would be considered earned income. What happens if you write a book? The IRS says that is earned income too. Karen Slaughter’s argument is that the books she sells is partially earned income but largely due to her brand. That would be passive income (and not subject to self-employment tax).
The IRS didn’t buy her argument. And, so as it ended up, neither did the Tax Court. Book sales are subject to self-employment tax unless you’re operating as a corporation. Either way, though, it’s active income, not passive income.
What is your next step with your business? Our goal at USTaxAid is to help you keep more of your hard-earned money. Our Wednesday Coaching talks about new case law, new strategies and step-by-step guidelines for what you need to do.