Royalty Payments and a 1099-NEC

[MrZeppo92]

I am trying to understand how to fix my taxes for royalty payments I am receiving.

I receive royalty payments as part of a business deal with a company for a product idea they sell. I am not self employed, I am not my own business, I am just a person who came up with a product idea. I have a full time job with a company, this is just additional income.

Last year I received a 1099-NEC and used TurboTax to do my taxes. TurboTax classified the income as self employment income and I filed my taxes in 2022 that way. I had to pay taxes on those royalties and paid self employment tax.

This year I went to do my taxes in TurboTax and got hit hard. I was doing some research on the IRS website and it said I shouldn’t be classifying royalties as self employment if I am not self employed, have no business expenses or my own business. I should have been classifying this as supplement or misc income.

So I have two questions for my circumstance;

• How do I take my 1099-NEC and classify that income in this year’s taxes if it isn’t self employment? I didn’t get a 1099-MISC but these are definitely royalties.  Should I enter it as a 1099-MISC?

• How do I correct my 2022 tax returns for paying self employment taxes on that income?

[MrZeppo92]

So far the best advice I've derived from my research is that this 1099-NEC that I received from the company I got royalties from should have been a 1099-MISC because it is intended as intangible royalty income, not self employment income.  Entering it as a 1099-NEC is going to force me into Self-Employment in TurboTax even though it does not apply to me.

I was advised to do the following;

- Remove the 1099-NEC from TurboTax

- Go to Federal "Wages and Income"

- Go to "Rentals, Royalties, and Farm" and select the Schedule E.

- Fill out the Schedule E info

- Enter the my royalty income in Box 2 of a 1099-MISC as it was intended
- Entering the income reported on a 1099-MISC instead if a 1099-NEC could end up generating a letter from the IRS because the income wasn't reported on Schedule C.  You can be prepared for this easy explanation that the royalty income reported on Schedule E was incorrectly reported on Form 1099-NEC.  Because it was royalties and not a working interest, it was reported correctly.
- Navigate to my 2022 return and amend that by following the same instructions I followed above
- Contact the company I am getting royalties from to request they correct my 1099s in the past and going forward to be 1099-MISC, not 1099-NEC

[AnnetteB6]

The steps you outlined are good.  There is one thing that you could do differently in the reporting of the royalty income.  Instead of entering the income as if it had been received on Form 1099-MISC, simply enter it as 'other income' not reported on Form 1099-MISC.  This may prevent the letter from the IRS since the amount will match the Form 1099-NEC.  

All of the other steps are on the right track.  

@MrZeppo92