Royalties from Creating Something

[Kram BergGold]

My client as an employee creates fonts. In addition to his W-2 wages, he gets a 1099 Misc with royalty income from his employer. As this income is connected to his employment I report it on Schedule E rather than Schedule C. I am thinking this could be considered a trade and generate QBI. What do you think?

[Burke]

If it is connected to his employment, it does not go on Sche E. It goes on a Schedule C. And it would generate QBI. Another consideration would be how the agreement between the employee and employer reads and how it determines who owns the fonts he creates. If the company owns them, any royalties are treated as compensation and should be in Box 1, 3 & 5 of his W-2. If the employee owns them, they are related to his trade and go on Sche C. There should be such an agreement covering this as well as what happens when he leaves employment, and a host of other issues.