NO SE Tax On Temporary Job

[taxea]

WHAT is the AUTHORITY that states that NO self-employment tax is due on short-term,
or non-recurring or temporary jobs, etc? It was an IRS ruling but I cannot find it now.

It isn't a ruling. It is somewhere in Pub 17, the instructions for Sch C (I think). I have used the wording several times, though not receintly it goes something like this:
not engaged in self-employment in a consistant or continual manner.

As for Sch C don't forget that if he has intent of gainful income this may not be a hobby. Of course I would say that if he has been paid more than once a year or a substantial amount for his writings over a relatively short period then it should be Sch C and subject to SE.

[Davc]

I also have a systems analyst who writes romance novels on the side. Her income goes on Line 21. Facts and circumstances control and are different every time.

How many does she have to write before you consider it a business?

[snowshine]

What the client thinks about the subject matters because it is their money and their tax return. We are discussing one of many gray areas in taxes where the facts do not neccesarily delineate clearly between choices. What my client wants matters greatly to me in these matters (and I keep copious notes of the discussions.)

[Bees Knees]

In §1.183, they give the following example:

Section 183 is the hobby loss rules. The hobby loss rules deal with whether or not you can deduct expenses that exceed income.

Section 1402 is the Self Employment rules. Section 1402 deals with whether or not an activity is subject to self employment tax.

You run a huge risk if you think the two code sections are consistent and compatible with each other. They are not. The only purpose for Section 183 is to disallow a loss. For example, assume an activity loses money 4 out of every 5 years. The activity is a hobby, unless the taxpayer can show by other facts and circumstances it is a business. Assume the taxpayer has lousy records, doesn't really have much expertise to do the job, and only does it one day per week. His wife works full time and basically makes enough to support the family. He sits on the couch the rest of the week watching TV.

IRS rules it is a hobby. He cannot deduct the losses.

Now let’s take the same set of facts and circumstances, only this time he nets $2,000 per year in profits. Never shows a loss. Same lousy records, same lack of expertise, only does it once per week, sits on the couch watching TV the rest of the week, wife makes majority of income.

Is it a hobby, not subject to SE tax? Of course not. It is his only activity besides watching TV. He makes a steady profit. It is regular and continuous. And he has been doing it forever.

The point is, the two code sections apply to two different tax issues. The facts and circumstances used for one code section are not the same facts used for the other. You can’t use Section 183 to prove it’s not subject to SE tax under Section 1402.

[dtlee]

I agree that all facts and circumstances must all be taken into consideration in determining if an activity is a business or hobby activity. The regulations and audit guide that the IRS released within the past few years are likely what Dyne was referring to and they both emphasize this. I agree that the mere fact that an activity has only occurred once does not automatically make it exempt from self-employment tax, but likewise, the mere fact that an activity has occurred twice does not automatically (nor retroactively) make it subject to self-employment tax.

In §1.183, they give the following example:

The taxpayer is a wealthy individual who is greatly interested in philosophy. During the past 30 years he has written and published at his own expense several pamphlets, and he has engaged in extensive lecturing activity, advocating and disseminating his ideas. He has made a profit from these activities in only occasional years, and the profits in those years were small in relation to the amounts of losses in all other years. The taxpayer has a very sizable income from securities (dividends and capital gains) which constitutes the principal source of his livelihood. The activity of lecturing, publishing pamphlets, and disseminating his ideas is not an activity engaged in by the taxpayer for profit.

[taxea]

I answer that question with one of my own, namely, "What does the client think it is?" I have 1 client in almost exactly your situation and we put it on SCH-C. As he is already way over the SS limit it only costs him medicare and he gets deductions for the tips and other out-of-pocket expenses (everything else is paid for). Another client insists on the Line 21 route even though her "appearences" are twice a year. The appearences are unrelated to her normal job so I go along. Neither has ever heard a peep from the IRS.

Again, if his employer pays for the seminar I don't understand how this is Sch C income. His Sch C is writing isn't it? I side with the twice a year poster....income on Ln 21 linked to 2106 as reimbursement or directly on 2106 as reimbursement unless he can prove to me that it belongs on Sch C. Does he write for his employer? Is the seminar for writers? Why is employer sending him there?

What does it matter what the TP thinks it is. What can you prove it is?

[taxea]

My college professor is paid $3000 to attend a weekend as a "fellow" (he is also a writer) and I have always put it on a Sch C subj to SE tax.

If you get right down to it, he is paid to play, and not a lot of work. They wine and dine them, and it's always a fun weekend.

This is only my second year with him, and it looks like this is a regular, annual event.

I considered it as Line 21 for a fleeting moment, as it really is more of a social thing, but it happens every year and is reported as non-empl. comp.

I KNOW I won't be questioned if I err on the side of the IRS, but was I doing the right thing by my client? Or should I have asked for an opinion before making that call?

I would put it on 2106 as a reimbursement....how can it go on Sch C if employer is paying for it?

[tpert]

I really think that's a misreading of the ruling. It says that one book would not be regular, in the extant case there were 28 books, but it never attempts to refine the grey area in between. It doesn't say "writes as much as one more book", it says "writes other books and materials" - clearly referring to this particular case, not establishing a general rule. The wording is illustrative, not formal. The formal part is where the ruling says "depends on the facts in the particular case."

For example, if he writes one book, then twenty years later writes another, I don't believe you can argue that all of a sudden it has become regular and the new book must be on schedule C (let alone go back and change twenty years of royalties, or even just three). Assuming the author clearly isn't trying to turn writing into a livelihood, it's still not a regular activity.

Even a second book a few years later doesn't automatically convert it into a Schedule C. You have to look at all the facts.

Gary,

I agree with you. There are many conditions which can cause a hobby to be eligible to be treated as a business and or a busines to be treated as a hobby. The facts and circumstances of the situation dictate how it is treated. I have a client who for many years had a hobby that he worked on sporadically and did not rely on for a living since he earned a significant salary from his regular job.

When he was laid off and could not find work, he decided to try to make it to retirement age off the hobby activity he had now become so knowledgeable about. By the time I gained him as a client, he was working 30-60 hours a week at this hobby and was nationally recognized for his efforts. Based on this and other characteristics of this endeavor, he now met the qualifications to treat this as a business. However, when he was devoting the odd weekend or vacation to this "hobby" and accepting orders only when it suited his work schedule, it was truly not a business. The fact that it became a business after he lost his job did not mean that the prior years were prepared incorrectly or that they should have been amended.

The facts and circumstances are what matters and we need to understand and we need to explain these characteristics clearly to our clients so that they understand what kind of evidence is required either way and how grey an area this can be.

[Gary2]

Thanks for the tips; I didn't realize that. I haven't had to deal with any authors in my practice yet, but I'll remember this in case if I ever do. It seems that anyone who writes one book will likely attempt to write another, so Schedule C is probably the default I'd go with unless the client has a very special circumstance and fully understands the ramifications of their decision.

What will you do when they disallow the loss the first year, due to that "business" trip to attend a convention, asserting that the book was just a hobby activity?

I suggest learning a bit more about an industry before jumping to shortcuts such as "Schedule C is .. the default." The question to ask isn't whether or not they'll likely attempt to write another (some will, some won't), but rather, will they sell another? Most won't. I'll go out on a limb and say that a struggling actor has a better chance of getting a second role than a fiction author has of selling a second book.

Before you go to that Schedule C, ask questions. Does the author have an agent? Any contracts? Did they publish through a vanity press? Have they done anything that they can prove influenced sales? If non-fiction, are they writing in an area related to their day-job, or for which they have expertise? If fiction, how long between books? And so on.

[Gary2]

Note the phrase "writes only one book," and "never revises it." If he does write a second book, then the first book is no longer considered a one time deal and it too would be subject to SE tax.

Thus, there is no such thing as treating the first book as not subject to SE tax and the second book as subject to SE tax. The minute he writes a second book or revises the first, Rev. Rul. 68-498 no longer gives him permission to avoid SE tax on the first book.

I really think that's a misreading of the ruling. It says that one book would not be regular, in the extant case there were 28 books, but it never attempts to refine the grey area in between. It doesn't say "writes as much as one more book", it says "writes other books and materials" - clearly referring to this particular case, not establishing a general rule. The wording is illustrative, not formal. The formal part is where the ruling says "depends on the facts in the particular case."

For example, if he writes one book, then twenty years later writes another, I don't believe you can argue that all of a sudden it has become regular and the new book must be on schedule C (let alone go back and change twenty years of royalties, or even just three). Assuming the author clearly isn't trying to turn writing into a livelihood, it's still not a regular activity.

Even a second book a few years later doesn't automatically convert it into a Schedule C. You have to look at all the facts.

[AJsTax]

Just for a little twist

in all this. I agree that we can not know what the client will do in the future, we have to make a decision that works for that client in that year, BUT just because something is regular and continuous does not automatically make the income Sch C income. I have a few clients that work as employees selling tires or appliances. Each month or quarter, depending on the manufacturer, they receive a "bonus" directly from the manufacturer that they represent in the store. Keep in mind that they work for the retail store, not the manufacturer. Now they are receiving this income on a regular basis and for as long as they work selling those goods and it is their regular job to sell those goods so you would think that income would be subject to SE income (it is reported on a 1099-misc, sometimes in box 7, sometimes in box 3). That was what I was told and believed for a long time. By rule it is not. They are called spiffs, and are reported on line 21 not subject to SE. See Pu. 3204. Even the IRS goes along with their own instructions and if you are not in a trade or business then the income is not subject to SE. Remember in this case they are employees, not self employed.

[MilTaxEA]

This illustrates the silliness of the whole discussion. How can any of us predict what a client will do in the future? When you take the position your client only did that job on a one time basis, you are basically sticking your neck out and gambling the client doesn’t change his mind and do it again next year. When your client gets audited and hit with underpayment penalties and interest because you believed your client would never do it again, guess who your client is going to blame?

Thanks for the tips; I didn't realize that. I haven't had to deal with any authors in my practice yet, but I'll remember this in case if I ever do. It seems that anyone who writes one book will likely attempt to write another, so Schedule C is probably the default I'd go with unless the client has a very special circumstance and fully understands the ramifications of their decision.

[joanmcq]

IMHO, the twice a year speaking engagements and once a year 'party' trip are SE. Neither is a one-shot that is not regular or continuous, like the bush-hog example. 'Where the client wants it' is not defense in audit. Just because it hasn't been caught, doesn't mean it's correct.

[JohnH]

--> guess who your client is going to blame? <---

Oh, that's easy.
Of COURSE the client will blame himself for not being forthright with me.

[Bees Knees]

Keep in mind audits are done a few years after the fact. If you write a book in 2010 and say it isn’t subject to SE tax, then change your mind and write a second book in 2012, then get audited in 2013 for the 2010 tax year, your defense of the 2010 book being a one time deal is no longer true.

This illustrates the silliness of the whole discussion. How can any of us predict what a client will do in the future? When you take the position your client only did that job on a one time basis, you are basically sticking your neck out and gambling the client doesn’t change his mind and do it again next year. When your client gets audited and hit with underpayment penalties and interest because you believed your client would never do it again, guess who your client is going to blame?