Royalties taxed as capital gains

[LolaMento]

What is the name of your state? WA

Please help, i am confused.

I am receiving a monthly bonus amount (about half my income for the year) that is part of an agreement with a company to use software we created. They have exclusive use of the product. we were told that this money would be taxed as capital gains, and it was paid outside of the paycheck, so there have been no withholdings on it.

I received a 1099-MISC reporting this money, and it was reported under box 2 as "royalties". Of course when i plug this into TaxCut software, I end up with huge penalties, and it is taxing the amount as ordinary income, and plugging it into schedule C and SE, instead of using schedule D. I think i am suppose to reference section 1235, but i really dont know how to fill out the forms, or even if I was misinformed when told that the bonus would qualify for capital gains rate.

[Some Random Guy]

The situation you describe sure sounds like royalties rather than capital appreciation of an asset you own. Perhaps their accountants' good sense overrode the management personnel who has initially told you how your income would be characterized.

Edit: end result. Unless you were promised a specific tax characterization in your contract, I don't see that you have any recourse here.

[LdiJ]

Originally Posted by LolaMento

What is the name of your state? WA

Please help, i am confused.

I am receiving a monthly bonus amount (about half my income for the year) that is part of an agreement with a company to use software we created. They have exclusive use of the product. we were told that this money would be taxed as capital gains, and it was paid outside of the paycheck, so there have been no withholdings on it.

I received a 1099-MISC reporting this money, and it was reported under box 2 as "royalties". Of course when i plug this into TaxCut software, I end up with huge penalties, and it is taxing the amount as ordinary income, and plugging it into schedule C and SE, instead of using schedule D. I think i am suppose to reference section 1235, but i really dont know how to fill out the forms, or even if I was misinformed when told that the bonus would qualify for capital gains rate.

I agree that the payments certainly appear to be royalties.

However, you are also doing something wrong, or the software is doing something wrong.

Royalties would be reported on Schedule E and are not subject to self employment tax, therefore would not report on Schedule SE.

Now, one last issue: If you were no longer employed by the company, would they still use your software and would you still receive the royalty payments? If so, then they are definitely royalties.

However, if you must remain in their employ in order to receive the payments, then it may technically be wages, and the employer may be acting improperly. I suspect however that its more likely that its the former.

Get yourself an appointment with a tax pro. This may be a situation where you really shouldn't be attempting to do your own taxes.