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I am setting up an "open" source project. The source code is available for educational and personal use and modification but not for selling or redistribution.

In this project, I expect that many individuals will contribute code. The code can measured and a ranking of the top 10 contributors can be generated.

The project will have a revenue through ads. I want to do two things with this revenue:

  • If there are money and the project is making a profit, to split the money proportionally based on the ranking of contributors.
  • If there are no money, then no pay to anyone.

Conceptually, I believe I can give the money I make from ads to anyone I please (after taxes have been paid through 1099). What I don't know is how this transaction (exchange of money) is classified.

Is it a donation? Are the contributors volunteers that may end up getting paid or not? Or are they contractors that do the work with hopes that they may get paid but understanding that this is contingent on ad profits. Have there been historically contractors that did the work but expected pay only when a project succeeded?

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  • Where is the entity that would be collecting the ad revenue and (potentially) paying contributors? Its domicile determines what tax and labor laws it would be subject to.
    – feetwet ♦
    Jul 24, 2016 at 14:21
  • I will be the sole proprietor and I am in the USA
    – Michael
    Jul 24, 2016 at 15:10
  • Do you expect them to sign over their copyright? If so, what do they get in consideration? Work for hire is a concept in copyright law, "work for free" not so.
    – MSalters
    Jul 25, 2016 at 19:19
  • MSalters, I am not sure on this. My perspective is that if they do not sign off their copyright and everyone (say 1000 people) are copyright owners of the project, then how is the project's direction controlled? For example, what if 400 say they want it to become open and free while the 600 want to have ad revenue. My thoughts were, I reserve the copyright and any contributions are given off.
    – Michael
    Jul 26, 2016 at 0:12

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There are all sorts of legal perils in what you're describing. Therefore, you should consult with an employment attorney to ensure that you are compliant with your state's wage-and-hours laws, and to ensure that you have a contract and/or disclaimer in place to reasonably protect you and your entity from claims by contributors.

For tax purposes, in terms of payments you or your entity make to contributors: If the contributors are not employees, then any U.S. person or non-incorporated entity to whom you pay more than $600 in a single year must receive from you an IRS Form 1099-MISC listing the payments as "Non-employee compensation."

(If you are running the project personally, it's conceivable that you could "gift" the payments to contributors out of your post-tax income, up to the annual personal gift tax exemption for each contributor. But I don't think anybody would advise you expose yourself to direct liability by running the project in this fashion if there's any cashflow or intellectual property involved.)

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  • "Intellectually property involved" is a rather vague term. Within Open Source, at least two models are common: transfer of copyright to a joint body (how the GNU project works, for instance) or simple retention of copyright (like Linux - 2000 copyright owners or such). Certainly in the latter case, the different contributors cross-license each other, which means that there's no clear employer-employee hierarchy.
    – MSalters
    Jul 25, 2016 at 19:18
  • MSalters, the latter seems to be a bit more complex in terms of commercializing a product. Yes, Linux distros make money but through other avenues. Based on the answer though as far as I understand, if there is a disclaimer in place, there can be an agreement that the work is volunteer unless profit is generated from the project and then people become contractors and get compensated.
    – Michael
    Jul 26, 2016 at 0:16

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