delivering phone books

[oceanlovin'ea]

Client who is self employed as a cabinet installer delivered phone books last year for a little extra money.

I am second guessing myself today. I thought that since it is not his regular line of work, it can go on line 21 as other income not subject to SE tax. But the question my software asks me is "Is this "earned" income?"

Well, yes he did earn it. He did work for it. But it is not schedule C income.

So can it go on line 21 and is it subject to SE Tax?

Thanks

Linda

[erchess]

My Thoughts

Any time someone has earned income that is not subjected to either payroll or SE Tax you may get questioned on it. I can't give you any bright line rules on this but I consider four factors when I face this decision.

Is the amount of income from this activity very small relative to the taxpayer's overall income?

How often and over how long a period of time does the taxpayer engage in this activity?

Is the taxpayer actively looking for more work or a better rate of pay doing the same or similar work?

Assuming the money is reported on a 1099 Misc, what box or boxes contain the money?

For example I have as clients an elderly couple with total income ranging from 75K to 110K depending on how successful the man is that year in his hobby of trading stocks on an almost daily basis. A couple years ago they signed up for a survey related to their health. The company gave them physicals at no cost and paid them each 2.5K that year and agreed to pay them each 1K per year for the rest of their lives including year of death in exchange for the annual filling out of a survey and the obligation to be sure that their deaths and the causes thereof are reported by the survivor and then by their heir. The amount was small relative to other income, the money was reported in a favorable box of 1099 M and they did not anticipate participating in and have not participated in any more surveys. I can see room to argue with what I do but I put the money each year on Line 21 and until this year either my software (Intellitax at the time) did not support subjecting it to SE Tax or perhaps I just did not know how. Historically in my career I have put monies I thought should be hit with SE on C and only monies I did not think should be hit with SE on Line 21. Now that I have Drake and know how to hit Line 21 with SE I might take advantage of that if there were no related expenses to deduct and no EIC or other Credit to be affected.

[solomon]

See Batok vs Commissioner.

From Sch C Instructions:

Use Schedule C (Form 1040) to report income or loss from a business you operated or a
Profit or Loss profession you practiced as a sole proprietor. An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. For example, a sporadic activity or a hobby does not qualify as a business. To report income from a nonbusiness activity, see the nstructionsfor Form 1040, line 21, or Form 1040NR, line 21.

Note "...with continuity and regularity."

[oceanlovin'ea]

earned income

I was just concerned because my software asks the question about this being earned income.
Yes, he did EARN it. But it was a one time thing. Not his regualr line of work.

He didn't receive a 1099 for it. He just told me he was paid $320.00 for delivering phone books.

So my concern was about the SE tax. Normally the amount of $320.00 wouldn't be subject to SE tax, but because he has other Schedule C income, if I mark this subject to SE tax it is added to his other Schedule C income.

I am not trying to get out of the SE tax if it is due. I just really wasn't sure if it was subject to it.

Thanks for your thoughts.

Linda

[DaveO]

I would put it on line 21. Unless he aims to make phone book delivery a mini-career he flunks the regular and continuous test. This is a topic near and dear to me. I spent most of the time from 1984 to 1996 in the independent (not affiliated with the service provider) telephone book industry. I was hired to develop the delivery system that we used to hand deliver or mail the roughly 3.5 million books printed each year over a 15 state region.

That aside we did have people who delivered books year after year for us in each market and often delivered the competitors books as well. These people should report on “C”. The one timer or occasional delivery person should report on Line 21. The big difference is of course the ability to deduct expenses such as mileage or helper pay.

[Black Bart]

SE for occasional labor

This question has been kicked around on the board several times in the past and, while most seem to favor the line 21 treatment, I don't know if there's every been a solid consensus. Probably some don't want to take any chances and so put it on C to be safe.

The Batok case that Solomon refers to (Tax Court Memo-1992 www.taxpravo.ru/arbitration/int/article936618 is most often used to justify it, but I'm not sure if IRS always follows it. Anybody here know for sure?

If it's any consolation, you'll probably be okay no matter which way you go. I've done it both ways (according to my best judgment) several times over the years and it's never been qestioned/denied.

[Burke]

Probably some don't want to take any chances and so put it on C to be safe. .

The only problem with that, is that in some states they send Sche C info to the localities for business licenses. And even though the income might be subj to SE tax, I would not think proctoring SAT's once a year should require a bus license. So line 21 and Sche SE does the trick.

[Black Bart]

What

The only problem with that, is that in some states they send Sche C info to the localities for business licenses. And even though the income might be subj to SE tax, I would not think proctoring SAT's once a year should require a bus license. So line 21 and Sche SE does the trick.

I meant by "some people put it on C to be safe" was that people who decide SE needs to be paid to keep IRS off them usually put it on a Schedule C, although, as you say, it can also be put on line 21 and still pay SE.

In ocean-ea's case, I would put in on line 21, but I would NOT pay SE on it (following the Batok rule).

While it's not enough money to rate an audit, I'll bet a revenue agent would still try to collect the SE if they were ever audited for something else, as IRS seems more concerned with making money than what's fair/right/sensible.

[Kram BergGold]

Not earned income

Earned income in tax talk is income reported on line 7 or Schedule C. If you choose to put it on line 21 (which I would have done in your case) then you take it out of earned income for any and all tests that depend on earned income like EIC.

[FEDUKE404]

Vote for Sch C again

For my 2¢ worth I see it as income from "work" and therefore subject to Schedule C and Schedule SE issues.

I've never quite understood the exclusion "because they only did it once" or something like that which some board members cite. Perhaps I am not as enlightened as they are.

Example: How would they treat a person who works "a few days" helping out a buddy flipping burgers at a booth at the state fair, receives a Form 1099-MISC, but his regular job is an accountant?

FE

[DaveO]

Does he flip burgers at the fair every year?

I'm a BJCP ranked beer judge. I judge beer at the state fair, the county fair and various other competitions during the year. A fair bit of time and money is also spent on "research" to "improve my skills". I certainly pass on the regular and continuous points. However most competitions don't pay the judges and some pay a small stipend to offset travel costs. However some competitions pay a fairly generous fee of $50 to $100. I should also mention that I'm prohibited from charging for my services although I may take payment if offered. So now the "for profit" side of the argument doesn't look so good. Does the fact that some competitions pay me change the nature of what I do from a hobby to a business and the nature of my income from "other" to "self employment". If the IRS were to argue that the couple hundred bucks I may get throughout the year were to belong on a "C" how do you think the auditor would react when I produced my mileage and expense log showing a couple thousand dollars of travel and continuing education?

Each of these cases is governed by facts and circumstances. I may be more aggressive in keeping activities off of "C" rather then on "C". I try to best represent my client which ever way I report it. In all the audits I have been in regarding misc income I have never had the auditor move the income onto “C” but I have had them take it off of “C”.