is a copyright settlement taxable?

Question

i am a graphic designer.
i worked for 10 years as an independent contractor for a large company.
they then tried to stop working with me and offered me a small
settlement.
i hired a lawyer and went around in circles with them for a year and
they
finally gave me a settlement for copyright. they continue to sell their
products
with my designs.
the large company sold the company to another large company right after
they settled with me.
they never furnished me with a 1099 and when i pressed they said they
will
send me a 1099
indicating that the $$ was paid in settlement of a claim (box 3 - other
income) so that it is not subject to self employment tax. i never
received it.
but is this correct? do i have to claim the money i received as income
on my
self employment tax? it was not paid as wages as i had already left the
company a year before. also do i have to claim for federal and state
taxes? do i even mention it on my 1040 schedule c? if so where?

Answer 1

That's fully taxable, whether they send you a Form 1099 or not. If it was a lump-sum settlement for use of your copyrighted material, claim it under Other Income on line 21 of Form 1040, NOT on Schedule C. If it's part of an on-going income stream for continued use, claim it on Schedule E as royalty income.

It is not self employment income and no SE tax is due on it.

Answer 2

Based on your scenario, I believe it goes on Line 21 "Other Income." No SETX is due, just income tax. You have to report it even if they did not give you a 1099. It is possible it was mailed to you and reported to IRS, but the document got lost on the way to you. Failure to report it could lead to an IRS audit. You will owe tax on both Fed & State returns, less any pre-payments. File by April 16th to avoid a Failure to File penalty.

Answer 3

If it was for "economic" damages it is fully taxable. I think you have a case to just put it on line 21 of your tax return as "other income." That way it would not be subject to the Self-Employment Tax. If you were not in business for yourself, I think you are OK to treat it that way. It was basically a purchase of "intellectual property." If you are in the graphic design business on your own, it gets complicated. I still think a case can be made to put it on line 21.

If you chose to put it on Schedule C, it would be under gross sales. I think you need to see an EA or CPA.