Author’s “Brand Income” is Business Income Subject to Self-Employment Tax

All of a novelist’s publishing income was self-employment income from her writing business, rather than “brand income” attributable to her name and likeness. The Tax Court concluded that her brand was just a part of her writing business.

Becoming a “Brand Author”

The taxpayer, Karin Slaughter, is a successful “brand author” of crime and suspense novels. A brand author’s name and reputation are valuable to the publisher because they sell the author’s books. For example, Slaughter’s readers are more likely to ask for “a Karin Slaughter book” rather than a particular title.

Slaughter clearly takes her brand very seriously:

  • She believes that successful branding is the difference between merely writing, and writing for a living.
  • From the beginning of her writing career, she worked with agents, publishers and media consultants to develop a brand that includes her name and likeness.
  • She works to maintain and expand her brand through social media, newsletters and public appearances.

Success as a Brand Author

Slaughter’s efforts paid off. She was a brand author by 2007, and her publishing advances were eight times what they were when she started writing in 1999.

However, each book still took her about 12 weeks to write. Thus, she didn’t earn higher advances by investing more time or effort in her writing. Instead, she concluded, her additional income was due to her brand—principally, her name and likeness.

Can Brand Income Be Separated from Business Income?

Accordingly, Slaughter divided her publishing income into two buckets:

  1. The first bucket was her self-employment income from her writing business.
  2. The second bucket was income from her brand.

She limited the first bucket to the amount that a publisher would pay for a book from a non-brand author. She treated the second bucket as investment income because it was attributable to the intangible assets that made up her brand.

Nope—Brand Income is Business Income

The Tax Court disagreed, because Slaughter’s brand was part and parcel of her writing business.

Slaughter relied on Rev. Rul. 68-499, which concluded that employee wages did not include royalties that the employer paid to license the employees’ patents.

However, wages are limited to compensation for services. In contrast, self-employment tax applies to the much broader category of income from a trade or business. Since all of Slaughter’s publishing income came from her writing business, it was all subject to self-employment tax—even if some of it was attributable to her brand.

Branding in the Gig Economy

If Slaughter had succeeded in excluding her brand income from self-employment tax, the implications would have spread far beyond the world of authors, performers, and other workers who have traditionally built their personal brands.

That’s because branding is so ubiquitous in the gig economy. Freelancers, gig workers, and contractors of all sorts are frequently advised to build their “personal brands” by raising their profiles, improving their reputations, garnering good customer reviews and ratings, etc.

If Slaughter had won, these workers would have been able to argue that their increased earnings were also exempt from self-employment tax. However, the Tax Court made it clear that a reputation connected to a trade or business is part of that trade or business.

By Kelley Wolf, JD, LLM

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All stories by: CCHTaxGroup