Law enforcement side jobs

[oceanlovin'ea]

New client is coming in tomorrow. He is a deputy sheriff. I was supposed to have found out this information already......oops!!

He does jobs on the side, like the officer that directs traffic in front of churches, etc. Some of the other deputies that do this say that their preparer does not consider this as self employment income and it is not subject to se tax. He wants to do it the right way. But if this is not supposed to be subject to se tax he would rather not pay it.

So I told him I would check it out. Do any of you have a similar situation and how do you handle it?

some additional information I found. He got a 1099-misc from the security company that he did work for. The income is listed as other income, not non-employee compensation.

Thanks

Linda, EA

[DaveinTexas]

Hmmm...

I would direct you to Revenue Ruling 58-112 which characterizes a trade or business activity as one that is regular, frequent and continuous. The regularity of activities and transactions and the production of income are important elements. Taxpayers do not need to make a profit to be in a trade or business as long as they are able to earn a profit and have a good-faith motive to do so. They must, moreover, make ongoing efforts to further the interests of the business.

Also, see this article on this subject: http://www.journalofaccountancy.com/...l/20091639.htm

In this article, what struck me as interesting is the following passage:
OPEN QUOTE
OTHER INCOME
Some income-generating activities are deemed infrequent enough to constitute other income. Revenue rulings (58-112, 55-431 and 55-258) indicate that income from an occasional act or transaction, absent proof of efforts to continue those acts or transactions on a regular basis, are not income from a trade or business. Some examples of income-producing activities that were infrequent enough to escape being classified as a trade or business include:

An assistant professor coauthored a book without any obligation to later work on revisions. The fact that she did revise the textbook five years later did not matter (Langford v. Commissioner, TC Memo 1988-300).
A man created and patented inventions in his spare time (Levinson v. Commissioner, TC Memo 1999-212). The Tax Court held that he was not in the business of inventing because he did so only sporadically.
A commercial fisherman leased his fishing permit after he became ill and unable to fish. He intended to do so only sporadically (Chief Counsel Advice 200321018).
A corporate officer received a fee for negotiating an isolated sale of all the company’s stock. He did not regularly hold himself available to the public for negotiations (Revenue Ruling 58-112).
A man participated in a clinical drug study for which he was paid a lump sum. His intent was to receive treatment for asthma (Private Letter Ruling 9106004). CLOSE QUOTE

Another issue I will throw into the mix is how related is the activity to the taxpayer's profession. If a law enforcement officer is directing traffic/providing off duty security/providing security at a local town event each year, etc, these are all services a law enforcement officer might perform on a daily basis for his regular job. Regular and continuous is the key to SE income/operating a business. Occasional and sporadic activity is the key to "other income" treatment.

Good luck to you this year; try to stay sane!

[JohnH]

I think it is subject to S/E tax. The box the oayer chooses to use on the 1099-misc is irrelevant in this case; only the facts and circumstances control the classification.

[David1980]

Police officer taxes are a pain.

Not because there's anything especially difficult in the tax return itself, but because they all seem to think they qualify for a zillion "special" cop deductions.

Anyway, here's an article from 2013 offering an opinion on officer off-duty assignment SE tax. http://www.aicpa.org/PUBLICATIONS/TA...-story-01.aspx

[oceanlovin'ea]

thanks

Thanks for the article, David1980. It is always nice to have something in print to show the clients

Linda, EA

[Burke]

Police officer taxes are a pain.
Not because there's anything especially difficult in the tax return itself, but because they all seem to think they qualify for a zillion "special" cop deductions.

As do firemen.

[FEDUKE404]

Play it again

This is a continuing issue with police officers, and apparently also firemen.

Those who somehow hide behind "it's not a regular thing" for tax purposes are essentially missing the point.

Fact is, many (most?) police officers regularly supplement their primary income by having a second or third job, as well as often find darn near full-time jobs (hint, annual leave) around the time of special events such as a state fair or an extended sporting event.

A few of them now receive W2s, but most still receive Forms 1099-MISC. (We'll just not pursue those who are paid in $$$/benefits and receive neither tax document. . .)

I have seen (local) tax returns where the prior preparer put everything on the "wage" line of Form 1040 ("Well, I DID report the income. What's the doggone problem?") or squeal like a stuck pig when I put all of their extra non-W2 income on a Sch C/Sch SE. Oh yes, most of those folks find a "better" preparer to visit next time. C'est la vie.

But the tax rules are pretty clear to most of us. I have to show concern for my own donkey when preparing such tax returns. 'nuf said.

FE

[DaveO]

I am very often on the no SE tax side of these issues. With police officers performing functions similar to their ordinary duties I always consider it SE income. They would not be selected for such work except for the fact they are officers. They are often referred to the work by their captain. They must often have permission to take the extra work. I see this as no different than a tile setter you does the occasional side job of installing tile. Besides, where else would you deduct the brand new Kimber Gold Match II .45 ACP he bought?

On the other hand if the off duty officer is installing windows I might have a different opinion.

[Burke]

I see your reasoning but I don't know that the type of work is material, just the continuing practice of it. We discussed sports referees in another thread; most of these persons have jobs totally unrelated to sports and it is still SE income.

[oceanlovin'ea]

Line of reasoning

Another officer had this issue come up with the IRS. He wrote a lengthy letter to the IRS and the result is that he did not have to pay se tax. The reasoning is that they do not solicit this work. The department contracts for the work. If an officer would like to have these jobs, they can sign up for them. Then they are assigned by the department when to go and where to go. They must wear their uniform and carry their weapon. The company that contracts with the sheriff's department or police department also pays the department for use of vehicles. They pay the officers directly.
The Rev. Ruling 74-162 1974-1 C.B. 297 is cited as proof that the income is subject to income tax but not SE tax.

Linda, EA

[David1980]

Another officer had this issue come up with the IRS. He wrote a lengthy letter to the IRS and the result is that he did not have to pay se tax. The reasoning is that they do not solicit this work. The department contracts for the work. If an officer would like to have these jobs, they can sign up for them. Then they are assigned by the department when to go and where to go. They must wear their uniform and carry their weapon. The company that contracts with the sheriff's department or police department also pays the department for use of vehicles. They pay the officers directly.
The Rev. Ruling 74-162 1974-1 C.B. 297 is cited as proof that the income is subject to income tax but not SE tax.

Linda, EA

With 74-162,

"The remuneration the officers received for the traffic control assignments was established by the city council and collected by the police department. The police department coordinators authorized the payment of the additional pay to the officers for their off-duty services."

Both RR 74-162 and RR 70-504 are used by cops that would like their off duty pay to not be subject to SE tax. The article I linked does bring both up - http://www.aicpa.org/PUBLICATIONS/TA...-story-01.aspx.

Ultimately it's all a facts and circumstances thing. I think most current off duty assignments are more 1099-misc while the old revenue rulings were paid through their police dept (the police department actually collected the income from the third parties.) From the article, "A pair of revenue rulings issued in the 1970s contrast with the recent court rulings and suggest that, in the past several decades, municipalities have modified their practices in their involvement in the employment of off-duty police officers by third parties, to help ensure the municipalities are not deemed to be employing the officers when the officers work for third parties."

[oceanlovin'ea]

later tax court summary

I found a later tax court summary, TC Summary Opinion 2011-41....actually a case from Florida. That might help. This made the taxpayer pay the SE tax.

I just don't understand why the first page says "Pursuant to internal revenue code section 7463(b), this opinion may not be trated as precedent for any other case."
So do I use it or not? What does that mean?

Linda, EA

[oceanlovin'ea]

Know what I am doing now

Yesterday IRS released the "Dirty Dozen" tax scams. One of them was Frivolous Arguments. I am going to show this to the officer and tell him that when I find a recent case that IRS has had some input on and stated how they feel about not paying SE tax on side jobs, I need to consider that in how I prepare his tax return. The penalties are pretty hefty for such returns and I for one don't have any inclination to put myself in a situation that could even remotely end up like this.
I will file the income on Schedule C and then he will pay SE tax on it.

I am not willing to risk my reputation and risk being fined for any client.....especially a brand new one.

I appreciate all your help in resolving this matter.

Linda, EA

[FEDUKE404]

Worth repeating !

Yesterday IRS released the "Dirty Dozen" tax scams. One of them was Frivolous Arguments. I am going to show this to the officer and tell him that when I find a recent case that IRS has had some input on and stated how they feel about not paying SE tax on side jobs, I need to consider that in how I prepare his tax return. The penalties are pretty hefty for such returns and I for one don't have any inclination to put myself in a situation that could even remotely end up like this.
I will file the income on Schedule C and then he will pay SE tax on it.

I am not willing to risk my reputation and risk being fined for any client.....especially a brand new one.

I appreciate all your help in resolving this matter.

Linda, EA

From my post of February 13th:

I have seen (local) tax returns where the prior preparer put everything on the "wage" line of Form 1040 ("Well, I DID report the income. What's the doggone problem?") or squeal like a stuck pig when I put all of their extra non-W2 income on a Sch C/Sch SE. Oh yes, most of those folks find a "better" preparer to visit next time. C'est la vie.

But the tax rules are pretty clear to most of us. I have to show concern for my own donkey when preparing such tax returns. 'nuf said.

Linda - Do you have a link for the most recent "Dirty Dozen" ??

FE

[BP.]

Yesterday IRS released the "Dirty Dozen" tax scams.

Got this yesterday, too. Bummer that tax preparers made the list . . . again.