When paying a 1099 vendor for software licenses and annual renewals, do we need to report this in box 2 on the 1099-MISC form? We have been reporting it under box 7.

Follow

Box 2 is for royalties, which can apply to software in a specific way—a royalty payment for software would involve a situation in which your company adapts or integrates the software in a product of your own that you then sell to others. You’re paying a royalty for the rights to use the supplier’s software in this way.

However, assuming you are leasing the software for your own internal use—say it’s software that your company uses to do its accounting, and you make yearly payments to continue to use the software—that is considered a lease and should be reported as Rent in box 1.

In another software scenario, when you buy packaged software “off the shelf”—which you used to literally buy off the shelf, also referred to as “shrink-wrap” software, though today you just download it—that is considered merchandise and is not reportable. This is software that, once purchased, you have the right to use in perpetuity.

But if you are making periodic payments to continue to use software, i.e. leasing it, that’s considered and reported as Rent.

Have more questions? Submit a request

Comments