Avoid self employment taxes

Law & Legal
1

I am an unleased Cotenant in Texas. The revenue is being reported as non employment income on my 1099 which is subject to self employment tax. Any ideas on how to avoid or minimize the self employment tax on this type of income?

2

As an individual, you will have to report on Schedule C. Be sure to deduct all the JIB payments for well costs, and other direct costs such as postage. You may be able to deduct a portion of your health insurance and your accounting fees. Consult your CPA about this.

3

Visit with your CPA, I imagine that you need to report as royalty income.

This post is not legal, tax or investment advice. Reading or responding to this post does not create an attorney/client relationship.

4

Revenues from unleased minerals are treated for tax purposes as being a working interest. After payout, the MI receives all the income and has to pay JIB costs. The individual owner will report on Schedule C as self-employment income. The mineral owner will receive a 1099-NEC from the oil company.

5

Does dropping mineral rights into a trust avoid self employment income on unleased co tenant self employment income ?

1 Like
6

I have no idea. That is a question for your estate planning attorney and CPA, and any decision on a trust has long-term management, legal, tax and cost considerations.

7

There are many different types of trusts, which can have different tax consequences. Ask your CPA and estate planning attorney for advice. A revocable trust will not change the income tax result and neither will an IDGIT.

8

Other alternatives you can explore:

Sign a lease with the operator

Exchange / convert your WI into an ORRI

Sell the interest

These are more sophisticated alternatives (and may require professional assistance to ensure the valuation / exchange is fair) but could ultimately get you out of the self employment tax. I’d start with the first one if it were me.

I don’t believe putting it into a trust will impact the self employment tax. I too have found that self employment tax to be a significant downside to owning WI. In my WI leases the minerals are not owned by me so I cannot lease to get out of the WI.