Can You Use Schedule E To Report Your Stock Photo Sales?

"This tax season, I'm going to report my stock photo sales not as income on the standard Schedule C, but as royalties on Schedule E," a subscriber emailed me.

She said, "That way you can skip paying the 15.3% self employment tax, which consists of 2.9% Medicare and 12.4% Social Security. "

Here at PhotoStockNotes, we're not ones to pass up a juicy opportunity to give our readers an insider insight on how you can avoid taxes. (Avoiding is legal, whereas evading is illegal!). So I ran this concept by our crack tax advisor, Julian Block, who has a string of best-selling tax books to his credit, writes a syndicated tax column, and is a former IRS attorney and investigator.

"You could land in the deepest of tax doo-doo," was his comment. Why? "The IRS looks unkindly on photographers and other self-employed who try to escape self-employment tax."

Perhaps we have a case of semantics here. Yes, the word 'royalties' is used on Schedule E, and yes, the IRS defines royalties as 'payment for intangible properties' (e.g., books and artistic works, which would include photos) but the IRS warns that royalties for creative efforts have to be reported on Schedule C, making that income subject to self-employment tax."

Royalties from your coal, oil, or gas sites can be reported on Schedule E. "You are playing the 'audit lottery' if you report stock photo sales as royalties on Schedule E. True, you might never be discovered, but should you be, expect to be hit with a hefty bill for back taxes, interest, and penalties."

As Julian Block advises, Schedule C is the place to report stock photo income. The bad news is that you'll be subject to self-employment tax. The good news is that 1) you'll also be contributing to your social security benefits for your time of retirement, and 2) you'll qualify to shelter some of your income with deductible contributions to retirement plans.