Unexpected Sale of Created Software

[Gail in Virginia]

I got a call the other day from a client who runs a local non-profit. Seems her husband wrote a software program a couple of years ago and let another non-profit have it gratis for their use. Somehow,the non-profit changed hands, or management, or something, and the new "owners" were so impressed with this program that they wanted to purchase it. They have therefore wired the money to purchase it to my client's husband. The company purchasing the software is Australian - which doesn't really matter, except that I have no idea what kind of reporting they will do for this income, if any.

Now, normally, I would expect this to be schedule C income subject to self-employment tax if the creator of the software is in the business of creating software. But while he used to work as a programmer, he now "works" only for this non-profit and is actually taking his social security early because the non-profit business just doesn't pay very well. I remember reading something about former presidents who write their memoirs not being subject to SE tax on their royalties from the books because they are not professional writers. Would this be a similar situation? Does anyone know how I would report this and have any documentation for that method? If it is subject to SE tax, it will also affect how the social security he can draw this year.

[Pacun]

How much money are we talking about? Wouldn't it make sense to pay ss since he is collecting early?

Since he was a programmer, this is schedule Cincome. Remember that presidents are not writers and that's why they get a break if they only write one book.

[Gail in Virginia]

But he has never been in the business of creating and selling software - he worked for a large company as a programmer. Not sure that is the same thing at all. To the best of my knowledge, he was never a software developer.

We are talking about somewhere in the neighborhood of $26,000 US. I also don't think that a one time payment like this will increase his benefit, but if it is self-employment it would result in paying back part of this benefits this year (maybe - the work was actually complete several years ago, the software was just purchased this year.)

Thanks for the reply, Pacun.

[Bart]

Gailtaxed - I do not have time to research this more but I think that if the activity does not rise to conducting a trade or business the income is not subject to self employment taxes.

I found this in code section 1402:

c) TRADE OR BUSINESS

The term "trade or business", when used with reference to self-employment income or net earnings from self-employment, shall have the same meaning as when used in section 162 (relating to trade or business expenses), except that such term shall not include--

(1) the performance of the functions of a public office, other than the functions of a public office of a State or a political subdivision thereof with respect to fees received in any period in which the functions are performed in a position compensated solely on a fee basis and in which such functions are not covered under an agreement entered into by such State and the Commissioner of Social Security pursuant to section 218 of the Social Security Act;

(2) the performance of service by an individual as an employee, other than--

(A) service described in section 3121( b (14)( b performed by an individual who has attained the age of 18,

(b service described in section 3121( b(16),

© service described in section 3121( b(11), (12), or (15) performed in the United States (as defined in section 3121(e)(2)) by a citizen of the United States,

(D) service described in paragraph (4) of this subsection,

(E) service performed by an individual as an employee of a State or a political subdivision thereof in a position compensated solely on a fee basis with respect to fees received in any period in which such service is not covered under an agreement entered into by such State and the Commissioner of Social Security pursuant to section 218 of the Social Security Act,

(F) service described in section 3121( b (20), and

(G) service described in section 3121( b(8)( b;

(3) the performance of service by an individual as an employee or employee representative as defined in section 3231;

(4) the performance of service by a duly ordained, commissioned, or licensed minister of a church in the exercise of his ministry or by a member of a religious order in the exercise of duties required by such order;

(5) the performance of service by an individual in the exercise of his profession as a Christian Science practitioner; or

(6) the performance of service by an individual during the period for which an exemption under subsection (g) is effective with respect to him.

The provisions of paragraph (4) or (5) shall not apply to service (other than service performed by a member of a religious order who has taken a vow of poverty as a member of such order) performed by an individual unless an exemption under subsection (e) is effective with respect to him.