Royalties - Sch E or Sch C?

[Hoosier]

New client produces videos. He uploads the videos to youtube.com and receives advertising income when his videos are viewed.

He received a 1099Misc for over $200k for 2021 which is being reported as Box 2 Royalties.

He is continually producing and uploading videos to the youtube.com platform and believes future years will produce larger 1099Misc income.

For 2021 I plan to report his income on Sch C as he is continually producing and uploading new material. This is his only form of income, thus from my perspective, he is self-employed. However, since the income is being reported as royalties on the 1099Misc, I question if this is the correct strategy and/or the correct method to report on the tax returns. Is this income really Sch E income (no self-employment tax)?

Assuming he is indeed self-employed, I want to advise him to set up as an LLC to be taxed as an S-corp going forward, pay himself a salary and take shareholder distributions. His wife helps him with the work and he wants to put her on the payroll as well. Together, this is their sole source of income.

Has anyone here run into this type of situation? If so, how did or would you handle?

[Uncle Sam]

From TheTaxBook: P. 5-19

Royalties. Royalties may be received for the performance of person-al services or for the ownership of an intangible asset. Royalties are taxable as ordinary income and are generally reported on Schedule C (Form 1040) or Part I of Schedule E (Form 1040). For information about royalties from oil, gas, or mineral properties, see Schedule E (Form 1040) Supplemental Income and Loss, page 7-2.•When the producer or creator of a musical composition, literary work, or work of art receives royalty income in connection with a copyright on that product, the royalty arises from the perfor-mance of services and is reported on Schedule C (Form 1040) as self-employment income and is subject to self-employment tax.•Royalty income received by someone who purchases the copy-right of a musical composition or literary work as an investment is reported on Schedule E (Form 1040) and is not subject to self-employment tax.•Payments for the right to use a person's image or likeness are not income from services, even if described as royalties.Example: Paul was lead singer for the Zagnuts in 1979 and wrote their one hit wonder entitled "Wholly Bholly." He has been receiving royal-ties ever since, even though he has not performed as a professional musician for over 25 years. Paul must report his royalty income as self-employment income because he is receiving the income as a result of past personal services performed.Sale of musical compositions. A taxpayer may elect to treat the sale or exchange of a musical composition or copyright in musical works as a capital asset if the taxpayer's personal efforts created the property, or the taxpayer acquired the property through circumstances (i.e. gift) entitling the taxpayer to the basis of the person who created the property. For details on how to make the election, see Regulation section 1.1221-3.Sharing (Gig) EconomyTaxpayers who use online platforms to rent their home or provide on-demand work, services, or goods, are subject to taxation on income from those activities.Income from a sharing economy activity is generally taxable even if the taxpayer does not receive a Form 1099-NEC,Nonemployee Compensation, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. This is true even if the activity is a side job or as a part-time business and even if the taxpayer is paid in cash. Depending on the circumstances, some or all of the taxpayer's business expenses may be deductible, subject to the normal tax limitations and rules.Ride-share. Report all income and expenses associated with the business on Schedule C (Form 1040), Profit or Loss From Business.If there is a net profit of $400 or more, the taxpayer must also pay self-employment (SE) tax. See Self-Employment Tax, page 5-24.Rentals. Generally, rental income is reported on Schedule E (Form 1040),Supplemental Income and Loss, and is not subject to SE tax. See Rental Real Estate,page 7-3. However, if substantial services are provided, income is reported on Schedule C (Form 1040) and is subject to SE tax. See Providing substantial services, page 7-2.Note: Some Airbnb rentals that provide extra services could be considered substantial services and the income could then be subject to SE tax.Personal property rentals. Schedule E (Form 1040) is not used to report income and expenses from the rental of personal prop-erty such as equipment, bicycles, or vehicles, unless the personal property is leased with real estate. See Rental of personal property, page 7-2.

[TAXNJ]

See if the below IRS link (see Royalties) applies to your situation:

https://www.irs.gov/businesses/small...taxable-income

[Uncle Sam]

Look at TheTaxBook P. 5-19