Bonus for Referral Army Recruit

[Bonnie]

The military pays a bonus to retirees for helping recruit new soldiers. If the referral actually enlists they give a $2000 referral fee. First I have had one, but they issued a 1099-Misc with the $2000 in box 7. Has anyone else seen one of these and do I put this on a Sch C as business income? Seems more like other income but that would be box 3 of the 1099 Misc and they reported it in box 7 as nonemployee compensation.

[Koss]

Referral Compensation

I think that's a judgment call between you and the client. I agree that it probably is not self-employment income.

The question is whether the taxpayer is in the business of recruiting. The fact that he's not a salaried employee of the Department of Defense doesn't mean anything. If he was recruiting a couple dozen guys a year, and getting $2000 for each one, then I think it would be considered a trade or business, and it would be subject to self-employment tax.

The same kind of question arises with respect to fees paid to an individual who gives a speech. For example, an active or retired state senator might get a $500 fee for giving an address at the commencement exercises of a small two-year or four-year college. If he does that sort of thing once or twice a year, I don't think it's a trade or business, and it's not self-employment income.

At the other end of the spectrum are former US presidents and some highly paid "motivational speakers." These folks can command upwards of $10,000 for a single appearance. At some point it becomes a business activity, especially if it is a substantial portion of the guy's income...

The instructions on the back of Form 1099-MISC advise the recipient to report income in Box 7 on Schedule C if it is self-employment income, and to report it on Line 21 of Form 1040 if it is not self-employment income. The IRS is aware that sometimes income in Box 7 is not subject to self-employment tax.

It is not the reporting document that determines the taxation of an item; rather, it is the nature and character of the income that determines its treatment under the tax law.

BMK

[Bonnie]

Thanks that makes sense. I don't think he's in the business of recruiting. He recently retired and is now working another job, drawing military retirement and then also got this referral bonus.

[taxxcpa]

Non-employee compensation

The 1099 may have the amount in the wrong box. Since it is reported as non-employee compensation, the IRS is likely to make a rebuttable presumption that it is self-employment.