Residual income from Insurance sales

[rtsietsema]

New client in his 80’s was an insurance salesman and still receives residual checks from multiple sources. Some reported on 1099NEC. Others just a check stub. Totaling about $7,000. In reviewing the 2019 return, these were lumped together and reported as “Other Income”. I believe that was incorrect, as these were simply delayed payments of earned income which should have gone to Schedule C and ultimately be subjected to self-employment taxes on Schedule SE. My questions are:

1. If it does belong on Schedule C, can he still take advantage of a deduction for Self-employed Health Insurance, even though he’s not actively working.

2. Also since it is delayed income, and not passive income, can the Qualified Business Income deduction also be used?

Since I haven’t seen this particular situation before, I would appreciate any guidance from this learned group. Trying to get 2020 returns right and explain possible amendment options to the client for prior year(sj.

Thanks.

[Anarchrist]

https://www.law.cornell.edu/uscode/text/26/1402

(k) Codification of treatment of certain termination payments received by former insurance salesmen
Nothing in subsection (a) shall be construed as including in the net earnings from self-employment of an individual any amount received during the taxable year from an insurance company on account of services performed by such individual as an insurance salesman for such company if—

(1)such amount is received after termination of such individual’s agreement to perform such services for such company,

(2)such individual performs no services for such company after such termination and before the close of such taxable year,

(3)such individual enters into a covenant not to compete against such company which applies to at least the 1-year period beginning on the date of such termination, and

(4) the amount of such payment—(A)depends primarily on policies sold by or credited to the account of such individual during the last year of such agreement or the extent to which such policies remain in force for some period after such termination, or both, and

(B)does not depend to any extent on length of service or overall earnings from services performed for such company (without regard to whether eligibility for payment depends on length of service).


https://www.irs.gov/pub/irs-pdf/p334.pdf basically says the same thing

[RWG1950]

If your customer is receiving 1099-NEC's for renewal or trail commissions, it is my understanding that :
- These renewals are filed on a schedule "C" as regular self-employment income, subject to SE tax.
- He can use his medicare "B", "D" and medicare supplement premiums as an SE medical ins. adjustment
- The net amount of his "C" (less 1/2 FICA & SE medical) qualifies for calculation of the QBI deduction.
Most of these companies do not provide 1099's when paying less than $ 600 for the year.

[Burke]

Aren't the last 2 posts contradictory?

[Anarchrist]

Aren't the last 2 posts contradictory?

Yes. The first reply is the law, thus correct.

SE income is subject to SE tax. Just because something is reported on NEC doesn't mean it is SE income. The OP didn't give enough info to determine if the income in this situation is SE income or not.

[RWG1950]

Would an 80 year old person that receives $20K per year (on a 1099-NEC)
for serving on a local public charity's board of directors be the recipient of SE income ?
This person is actively involved in the charity's board affairs.
Thanks for comments.

[Burke]

Apparently if he is considered an employee due to various circumstances and his particular duties, yes.