Misc Income-Subject to Social Security?

[DaveO]

The problem with lifting the wage base is that the cost to benefit ratio is already a bell curve. If we make someone earning $1 million per year pay FICA tax on the whole amount are we willing to let them draw $250k per year in social security? If you don’t do that then it ceases to be a social insurance program and becomes simply another wealth transfer program.

I have a similar problem with the current 2% FICA tax cut. The money is made up from the general fund. This further erodes the status of SS as an insurance program and subjects it to the vagaries of the budget process like any other program.

I wanted to throw one more item on this thread. I’m sure we all have see the 1099MISC forms issued for participation in medical studies. I don’t think anyone questions that this is not self employment income. I have a client whose sole source of income is medical studies. She is married and her husband earns a normal income. She earns from $5000 to $15,000 per year doing these studies, no other income. The activity is clearly engaged in for profit and on a regular and continuous basis. Any thoughts?

[taxmom34]

closing this loophole

this is a big loophole that i think should be addressed. if a person participates physically or mentally it is work and should be subject to SE . how else are we going to put money back into that system and if they won't lift the maximum income subject to SS?

[JohnH]

Here's part of the verbaige from the Batok decision:


We believe that petitioner's installation of windows for ___ does not rise to the level of a trade or business. Petitioner's activity, although engaged in for profit, was neither continuous nor regular. Petitioner had never installed windows prior thereto nor at any time thereafter. Rather, petitioner's activity was a "one-time job". Sloan v. Commissioner [Dec. 44,879(M)], T.C. Memo. 1988-294. Accordingly, petitioners are not liable for self-employment tax on the compensation received from ____.

[RitaB]

Agreed

And, apparently, it can be argued that hanging siding and replacing windows is a hobby or and/or an enjoyable endeavor.

Let's face it: much of this depends on the auditor you get.

And, whether or not you got a 1099. Cause if you didn't get a form, it never even happened, according to my hairdresser's mechanic.

[DaveO]

I think the intent of the person engaging in the activity is important as well as if the activity is in their normal field of endeavor.

I may be more aggressive than some on this topic but here is how I have handled some of my cases.

An off duty police officer providing security is subject to SE tax. (Profit motive)
An attorney coaching his daughter’s softball team is not. (No profit motive)

Schedule “C” is for activities engaged in for profit. I’m a certified beer judge and occasionally I am paid for judging competitions. While taxable income, this is not an activity I engage in for profit. Rather, there is considerable element of personal pleasure which is one of the factors the IRS will use to determine that an activity is a hobby not a business.

You must ask enough questions of your client to meet your own comfort zone.

[taxea]

Extreme example: Had a client who two years in a row won 1500 or so in the annual fair demolition derby. They reported the amount in box 7 which may or may not have been incorrect. I put on line 21. However, I never thought of putting the amount on Sch. C and then backing it out somehow. Then including on line 21. But that method could have its potential problems also.

I don't think that is necessary. I just put it on ln 21 with statement "not subject to SE tax.

[dan doshan]

Extreme example: Had a client who two years in a row won 1500 or so in the annual fair demolition derby. They reported the amount in box 7 which may or may not have been incorrect. I put on line 21. However, I never thought of putting the amount on Sch. C and then backing it out somehow. Then including on line 21. But that method could have its potential problems also.

[FEDUKE404]

Definitely.....maybe

This dead horse has been absolutely pulverized by responses in previous threads.

Various "questions":

Did the guy "just do it once?"

Was he really in business?

Did he print any business cards or advertise?

Did he spend the entire summer putting up siding/windows????

And many more.

I think there were even some of those "I've ALWAYS done it this way and never had any problems!" responses.

You will need to make your own decision. The bulk of the posters felt that "work" or similar reported on a Form 1099-MISC does need SE tax calculated. Many others were just as adamant that there are many reasons why such "work" income does not.

In the opinion of several, apparently I, currently working as a tax person, could spend this upcoming summer as a lifeguard in Miami, receive a Form 1099-MISC, and not have to pay any SE tax. (Well, there is always the working with siding/windows argument... ) And then next summer I might do the same thing, for a change of venue, lobster trapping in Maine. Again no SE! (I guess there would be some tax confusion if instead I decided to be a lifeguard next summer in Maine??)

I personally tend to agree with the comments made by RitaB.

And so it goes....my concern remains only with what goes out with my signature attached!

FE

[dan doshan]

Been awhile now but recall reading the instructions for Sch. SE and I believe it mentions to include income from a trade or business. Also isn't Sch. C used to report income from a trade or business.
As Gary mentions, what about hobby income. There was that case where a retired guy worked some odd jobs installing some siding or whatever for someone and got a 1099Misc. He fought the IRS that this was not self employment income and won. Court did not consider his activtity to meet the test that the fellow was engaged in a trade or business based on the usual test factors.

I now don't just arbritrarily put income from a 1099Misc reported in box 7 on Sch C. Depends on the various circumstances. It can be dicey as I would agree and have seen where later the client does get a letter from the IRS either requiring SE tax and or not noticing that this amount was reported on line 21.

[Gary2]

My contention is that if the guy worked, it's subject to SS/MC.

Surely it's more complicated than that. When the IRS rules that an activity is hobby income, the fact that labor was involved is generally not accepted as conclusive that it was Sch. C, subject to FICA/SETA.

[Burke]

Well, I think if it's on a 1099-Misc with an amount in Box 7, IRS will send a letter in 18 months if you don't put it on Sch C and then back it out as an expense. I would do that to keep down the panic in 18 months. Not to mention my time wasted having to "splane" later, Lucy.

Hey, nobody mentioned my two day employee not being refunded SS/MC argument. I thought that was pretty good...

I have put that income on line 21 many times, rather than a schedule C, but always did schedule SE and computed the tax. Haven't tried it with Box 7 info and NOT done a SE. PS: I thoroughly liked your 2-day employee scenario. Made perfect sense to me!

[RitaB]

Well

If it is NOT a recurring item of income you simply report it on line 21 of page 1 of the return and it is NOT subject to self-employment tax. No schedule C is required.

Well, I think if it's on a 1099-Misc with an amount in Box 7, IRS will send a letter in 18 months if you don't put it on Sch C and then back it out as an expense. I would do that to keep down the panic in 18 months. Not to mention my time wasted having to "splane" later, Lucy.

Hey, nobody mentioned my two day employee not being refunded SS/MC argument. I thought that was pretty good...

[Burke]

If it is NOT a recurring item of income you simply report it on line 21 of page 1 of the return and it is NOT subject to self-employment tax. No schedule C is required.

I agree. No Sche C necessary if you are not going to pay SE tax. However, I agree with RitaB on the intent of the law concerning income subject to SE taxes. I know about the court case. I simply disagree with the ruling. As I do "Fischer" on demutualization stock basis.

[Gretel]

Yep, it all depends on being within the range of what person normally does for income. If in line of business then subject to SE if not than it goes on Line 21. I believe IRS has some examples on their website and our board has plenty of input regarding this issue.

[dyne]

If it is NOT a recurring item of income you simply report it on line 21 of page 1 of the return and it is NOT subject to self-employment tax. No schedule C is required.