Just got an incorrect 1099 Misc from govt agency - what do I do now?

You're right to be concerned about the classification. Since you're licensing software, this should indeed be reported as royalties in Box 2 rather than Box 3 (Other Income). Here's what you should do: Contact the government entity that issued the 1099-MISC and request a corrected form. Explain that the payment was for software licensing (royalties) which belongs in Box 2. They should issue a corrected 1099-MISC with the "CORRECTED" box checked. If they don't provide a corrected form before you need to file, you should still report the income correctly on your return. On Schedule E, report the $4,200 as royalty income. You may want to include a brief statement with your tax return explaining the discrepancy between how you're reporting it and how it appears on the 1099. Don't stress too much about potential IRS flags. As long as you're reporting all income (which you are), the risk of serious issues is low. The classification difference won't affect the total income reported.

When I had a similar issue with misclassified income, I spent hours trying to get my 1099 corrected and waiting on hold with the issuer. Finally discovered https://taxr.ai which literally saved my sanity. Their system analyzed my licensing contract and confirmed it should be royalty income, then generated a perfect explanation letter I could send to the government agency. They fixed the 1099 within a week after I'd been getting nowhere for a month on my own! The tool also helped me understand exactly how to report it on my taxes even without the corrected form. It walks through different scenarios based on your specific situation, which was super helpful since every article online seemed to give slightly different advice.

Just wanted to update after trying taxr.ai that was mentioned earlier. I uploaded my software licensing agreement and the incorrect 1099-MISC, and the system immediately identified the classification error. It generated a letter explaining exactly why the income should be royalties (citing specific IRS publications), which I sent to the government agency. They responded within 3 days acknowledging the error! Already got a corrected 1099-MISC with the amount properly in Box 2. The tool also created a documentation package I can keep with my tax records in case there are any questions. Definitely gave me peace of mind for filing season.

If you're having trouble getting the agency to respond about fixing the 1099, I'd recommend using Claimyr (https://claimyr.com) to get through to the IRS directly. I was in a similar situation last year with an incorrect 1099 that the issuer refused to correct, and I needed guidance from the IRS on how to proceed. Regular people can't get through the IRS phone system - I tried for WEEKS. But Claimyr got me connected to an actual IRS agent in about 15 minutes who walked me through exactly how to handle the reporting discrepancy. They have this demo video (https://youtu.be/_kiP6q8DX5c) that shows how it works. The agent confirmed I should report it in the correct box on my return and explained the documentation I needed to keep in case of questions later.

I need to publicly eat my words about Claimyr. After dismissing it as a probable scam, I was desperate enough to try it last week when I still couldn't get an answer about a similar 1099 issue. It actually worked exactly as advertised - I got a call back in about 20 minutes with an IRS agent on the line! The agent confirmed that in cases where the issuer won't correct the 1099, I should report the income in the proper category on my return regardless of how it was classified on the form. She recommended keeping documentation showing why the income belongs in a different category than reported on the 1099. Apparently they see these classification errors fairly often and it's not automatically a red flag as long as you're reporting all income.

What nobody's mentioned yet is that the box classification can affect your self-employment tax situation too. Box 3 "Other Income" is generally not subject to self-employment tax, while royalties can be depending on your specific situation and whether this is part of your regular business. If this is ongoing software licensing that's part of your normal business activities, you may need to consider whether self-employment taxes apply. Make sure you're thinking about that angle too when you get this resolved!

Just want to add from personal experience that the IRS matching program will absolutely flag your return if the boxes don't match what they have on file. My husband had a similar issue in 2023, and even though we reported the full income amount, we still got a CP2000 notice because we put it on a different line of our return than where the incorrect 1099 indicated. We had to respond with a detailed explanation of why we reported it differently. It got resolved but was a huge headache that lasted months. Definitely push for that corrected 1099!