I'm not engaged in a trade or business, therefore no SE tax please

[LCP]

Has anyone had success arguing that "services" should not be subject to SE tax?

Taxpayer has a personal website related to his hobby. It gets enough traffic that he put a link on it that generated income every time someone clicked on it.

Taxpayer didn't include the income at all unfortunately so the IRS assessed him. I filed an amended return but didn't treat it as SE income. I explained why (in general) but that didn't fly.

IRS sent a notice that basically takes the position that it is SE income and "suggested" we need to get the payer to change the 1099 Non-employee Compensation they prepared. That isn't going to happen.

[JohnH]

If "services" aren't subject to self-employment tax, then they shouldn't be subject to FICA/Medicare tax if someone is an employee. How is this argument going to fly?

[LCP]

Sorry........ forget that I used the word "services". Just call it "income" ...... he performed no services.

[DaveO]

The IRS wants it both ways

If an activity produces a profit it's a business. If it results in a loss it's a hobby.

If they wish to maintain that it's a business then what are his costs of producing the income? Computers, internet connection, home office, domain registration, etc.

I would say this income could be incidental to his hobby and reportable on Line 21 with expenses on "A". You don't say how much money is involved but that could be a factor as well. If he is receiving several thousand $ a year and expects to continue to, it becomes hard to argue it's not a business. If it's a few hundred $ per year and not expected to be more it's easier to argue that it's income incidental to the hobby.

A few years back I had a client, a retired woman, who did some light delivery work for a friend who had a small business. She did it for only a few months until he could hire someone. He reported the income on a 1099 as non-employee comp. I reported it on line 21 when the IRS sent her a notice asking for the SE tax I replied that this was a one time event, she had not previously performed these services, had no intention of providing these services again, and therefore it didn't rise to the level of a trade or business. In this case the service agreed.

[Snaggletooth]

SE tax

I don't think there is a prayer in your situation for self-employment tax to be avoided.

Had the taxpayer included this income in his original return as Line 21, he MIGHT have been under the radar if the amount was modest and not incidental to his occupation. But not including this income brought the entire situation to light, and IRS considers this to be business-related income resulting from his web creation.

One of the worst things a taxpayer can do is to not claim income when there is a document notifying the IRS that the income exists.

[taxea]

I'm not engaged in a trade or business, therefore no SE tax please

Totally agree with DavidO. You may not think it is a business but selling for income is a business but it is how the IRS writes the rules not how you read them that counts. You do not have to engage in it "full-time". If it was a one-time thing then it goes on Sch D. However, this sounds more like at least part-time sales. taxea

[erchess]

Really?

I have a website for my tax business and I choose not to have links to commercial sites on it but what if I did put up links to sites that paid me for people who came to them from my site and spent money? Would I have to include that income in my business income or could I put it on 1040 L 21? Would it make any difference if the primary purpose of my website was related to an interest of mine that does not normally generate profit?

If I were to put on my site a link to one and only one site that paid me for visitors I sent, it would be a link to a site where I play Chess. The site offers a free basic membership but there is a full membership that can be paid for in US Dollars, Euros, Great British Pounds or about any other currency in the world or can be paid for by recruiting other full members. If I had such a link I would very likely refer more people than necessary to get a free year of membership but months of membership can be collected indefinitely. I realize that my taxable income from doing this would be the cost of the number of months earned during the year and would not stop at the approximately $US25 cost of one year's membership. However I would be caught putting it down on my return as Hobby rather than Business income. Would I be wrong?

[taxea]

I'm not engaged in a trade or business, therefore no SE tax please

I would say that this is a bi-product of the intent of your website and no it is not Ln21 it is Sch C other income. taxea

[LCP]

I guess the concensus is that any activity whatsoever that turns a profit is a "trade or business" and is subject to SE tax....... unless it is investing or renting of course.

The only out I see in TheTaxBook is the "regular and continuous" concept (Batok TCM 12/28/92) at page 5-23.

I know I've run into other opinions before but can't put my fingers on them. It may have been at a Gear UP seminar.

[DaveO]

Erchess, your income

would be incidental to your business. Therefore I would include it on your "C" or "1120S". Now if you had a website about your chess hobby and it resulted in the odd bit of income from links I would say Line 21.

The t/p in the original case messed up by not including income reported to the IRS. Had he put it on the original return it never would have been questioned.

[travis bickle]

Agree with

would be incidental to your business. Therefore I would include it on your "C" or "1120S". Now if you had a website about your chess hobby and it resulted in the odd bit of income from links I would say Line 21.

The t/p in the original case messed up by not including income reported to the IRS. Had he put it on the original return it never would have been questioned.

DaveO and taxea.

If the incidental income is derived from/through your business website, it should be "miscellaneous business income", i.e., income -- not revenue -- derived as a by-product. Goes on L6 of Sch C.

[Kram BergGold]

1099 issue

Your client received a 1099 with the income in box 7. You can contest the accuracy of the 1099 with the IRS. The IRS response of get it changed is not a final answer.
You can appeal that examiner's decision.
However, to me your client has a business. Let's say your client's hobby is chess playing. Some years he wins a little at tournaments. This is hobby income. Now he sets a web site having to do with chess and gets money from advertizers. To me this is a sepaate activity. The income has nothing to do with his earnings from playing chess. As this is not a one shot deal but a continuous activity he owes SE tax.

[veritas]

It occured to me the other day

that someone who was less than scrupulous, could indeed correct their own (or anyone else's)1099s or W2s easliy.

[joanmcq]

Sure they could. But it wouldn't be what was reported, now would it? Or are you saying filing a false 1096 to go with it? & signing & all?

Lets see...forgery, filing false documents, what else?

[geekgirldany]

The client generated enough income from the site for them to send a 1099. Google Adsense and other affiliate type programs require your SS# before they pay. They will send a 1099-MISC if it does go over $600. It should have been reported on a Schedule C along with the expenses that go along with the website. Domain name renewal, hosting, etc.