Discussion:1099 Misc Box 3 or 7

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Discussion Forum Index --> Tax Questions --> 1099 Misc Box 3 or 7


Linduca (talk|edits) said:

30 January 2009
For folks helping on a political campaign, how would you characterize their payment? Obviously sporadic, but it was done with payment in mind. Amounts varied as did involvement. I tend to say box 7. It was earned, received for efforts put forth. Is there an "industry standard" here? Thanks

Taxea (talk|edits) said:

30 January 2009
non-employee income. taxea

Linduca (talk|edits) said:

30 January 2009
Yes, that is what I thought also, box 7 nonemployee compensation. One of the recipients, however, told me a national tax prep firm said it should be in box 3 to avoid se tax. Yes, box three might avoid SE tax, but I was of the opinion that it would be subject to that tax. People hate to hear "more tax to be paid" news.

Larry0434 (talk|edits) said:

30 January 2009
See the instructions for the forms for a specific instruction related to where to place the amount. I have to challenge this categorizations in the past and have been successful. Is this an award? A difference exists in awards received and earned income.

Linduca (talk|edits) said:

30 January 2009
No, it was not an award. It was for distributing flyers, putting up signs, entering data, etc.

Linduca (talk|edits) said:

30 January 2009
Also, this would not be a re-occuring job once the campaign was over. So, that might have been the rationale for box 3 versus box 7. These folks helped from jul/aug thru oct/nov.

Blrgcpa (talk|edits) said:

30 January 2009
Actually, if they were employees, they should have received W-2.

AEM CPA (talk|edits) said:

30 January 2009
"One of the recipients, however, told me a national tax prep firm said it should be in box 3 to avoid se tax."

I hope he meant simply that he was told that an amount in box 3 is not subject to SE tax. I shouldn't be surprised either way, though. Quid est veritas?

Taxea (talk|edits) said:

31 January 2009
If the party receiving the 1099 was not self-employed and this is a one time payment it goes on Ln 21 which does not create SE.

KV (talk|edits) said:

January 31, 2009
SE tax kicks in when the person has actually physically performed (i.e. employed himself for) the work to earn the income which in this seems political worker did. From that angle this income should be reported on box 7 of 1099M and subjected to SE.

Linduca (talk|edits) said:

31 January 2009
re: AEM " I hope he meant" No, actually, he came back to me(the preparer of the 1099s) with the 1099 marked NO in box 7 where I had the figure and Box 3 checked or circled. I do not think he misunderstood at all what he was told. They clearly told him I prepared it incorrectly. A sole practitioner defending their stance against what an individual hears at a national prep firm is tough for the recipient to buy - especially when it means more money due to IRS.

As always all three positions - W-2,box 3, box 7- have their own arguments to support treatment, but I do find box 3 the least defensible, though perhaps the most commonly used in this situation, because work was done for the compensation received.

Riley2 (talk|edits) said:

1 February 2009
I see no trade or business here. This is a sporadic, occasional activity, not substantial, continous, or regular. Sounds like a box 3 activity to me.

Linduca (talk|edits) said:

1 February 2009
Riley2,

I agree that it may not be a "business," but I would think it would be subject to SE tax. Would you agree?

Taxea (talk|edits) said:

1 February 2009
Who is the "they" that told him you prepared the return incorrectly?

If it was a tax firm, I totally disagree with them. It goes on ln 21 and is not subject to SE. taxea

Linduca (talk|edits) said:

1 February 2009
Taxea, Actually, I am the one who thought it would be subject to SE since work was done to receive the payment!

Riley2 (talk|edits) said:

2 February 2009
Quoting directly from Reg §1.1402(c)-1, “In order for an individual to have net earnings from self-employment, he must carry on a trade or business, either as an individual or as a member of a partnership………”

Solomon (talk|edits) said:

2 February 2009
See Batok vs Commissioner as well.

KV (talk|edits) said:

February 2, 2009
Since he has earned this income by working himself, it should be subjected to SE tax as long as it has not been subjected to any payroll tax.

There is no question of not applying SE tax because he did not receive this income as a result of no work or effort (i.e. not earned).

Box 7 on 1099M is most appropriate place for this income. Now, even if we find some logic to put it on Box 3 it still be will subjected to SE tax not because of its position on 1099 but because of its nature of being earned by working for payer of income.

Riley2 (talk|edits) said:

2 February 2009
KV, you might want to read some of the case law or Revenue Rulings on this issue.

The Levinson and Batok decisions are excellent examples of instances in which earnings received by independent contractors were not subject to SE tax as a result of sporadic activities not rising to the level of a trade or business.

Wjalverson (talk|edits) said:

2 February 2009
It is not SE income. It should be reported on Line 21.

Think of it from another angle. What is the person's intent? From the instructions for Schedule C: "An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. For example, a sporadic activity or hobby does not qualify as a business. To report income from a nonbusiness activity, see the instructions for Form 1040, line 21..."

Just because I perform a service and get paid does make it subject to SE tax.

Happy Trails!

Ddoshan (talk|edits) said:

2 February 2009
So you have a hobby which just happened to have generated 5000 in income in 2008. But you also have 4600 in expenses against this income. One would think you would want to and be allowed to put this on Sch. C. Rather than take the expenses as misc. itemized deductions which may or may not be of any good at all to you.

KV (talk|edits) said:

February 2, 2009
Riley and wjalverson,

Thanks for your inputs. I agree to your reasoning.

Riley2 (talk|edits) said:

3 February 2009
Ah, but this is a double-edged sword. Since this is not a trade or business, all of their expenses incurred in the activity would be Sec. 212 expenses, and would be deductible only on Schedule A, subject to the 2% limit.

Death&Taxes (talk|edits) said:

3 February 2009
If the work is defined as six weeks of effort in September and October, I agree with Riley, but it's hard to tell from the original post.....suppose there people began in the primary last winter and continued doing this for almost a year. And the nature of the work might force me to change my mind; doing telephone surveys while volunteering is not exactly a non-skilled job. Seems to me in some cases, these people are the employees of this campaign.

Linduca (talk|edits) said:

3 February 2009
These folks worked, though not every day. They put up signs, distributed flyers, some did inputting, others ran data info. Another was in charge of following up on contributors, etc. The payments varied.

I suppose the larger issue is if this inocme is subjec to SE tax regardless of the box. They were not volunteers in that they got paid. However there were also volunteers. Does the income earned become subject to SE tax only if you have a "business" or rather if you perform services for the money. The Court cases above appear to support the position that doing work for the money is not, in itself, reason to be subject to SE tax.

Linduca (talk|edits) said:

3 February 2009
Sorry, thought the earlier part of my last comment included a copy of an earlier email: These folks helped from jul/aug thru oct/nov.

Riley2 (talk|edits) said:

3 February 2009
Sounds sporadic to me. However, if you believe that the earnings are not SE taxable, then the 1099 instructions direct you to make an entry in box 3, not box 7. The regulations make it clear that earnings not derived from a trade or business are exempt from SE tax.

Blrgcpa (talk|edits) said:

3 February 2009
Sounds to me like they were paid for their labor. They diidn't win a prize.

Riley2 (talk|edits) said:

4 February 2009
Yes, but that is not the point. Read the Batok decision where the Tax Court ruled that a window installer was not in a trade or business, and therefore was exempt from SE tax.
  • post from a non-professional, and related response, have been moved over to consQ

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