Turbo Tax Woes: Other Income vs Independent Contractor

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2sls
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Turbo Tax Woes: Other Income vs Independent Contractor

Post by 2sls » Thu Mar 08, 2012 12:32 am

The wife made some money(a few thousand) doing an one time job translating some papers for a professor last year- we used Turbo Tax and it asked us a bunch of questions regarding the work- Did she do the same work in 2008-2009 (no), doe she plan on doing this work in 2011-2012 (no), was this job related to her regular job (no), then it said this income is considered "other income".

Lo and behold, today I get a letter from the IRS saying we owe self-employment taxes which must mean that they think this was income as an independent contractor. Based on what I've researched, I think they're right, and I am guessing this is a bug from Turbo Tax then? (Back then I was completely clueless and just trusted TT) Any insights offered? I don't care about paying the taxes but I would be very unhappy to learn that TT's advice turned out very wrong.

jared
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Re: Turbo Tax Woes: Other Income vs Independent Contractor

Post by jared » Thu Mar 08, 2012 4:33 am

2sls wrote:The wife made some money(a few thousand) doing an one time job translating some papers for a professor last year- we used Turbo Tax and it asked us a bunch of questions regarding the work- Did she do the same work in 2008-2009 (no), doe she plan on doing this work in 2011-2012 (no), was this job related to her regular job (no), then it said this income is considered "other income".

Lo and behold, today I get a letter from the IRS saying we owe self-employment taxes which must mean that they think this was income as an independent contractor. Based on what I've researched, I think they're right, and I am guessing this is a bug from Turbo Tax then? (Back then I was completely clueless and just trusted TT) Any insights offered? I don't care about paying the taxes but I would be very unhappy to learn that TT's advice turned out very wrong.
Did your wife receive a 1099-MISC with the amount reported in box 7 (Nonemployee Compensation)? If so, this is probably what triggered the IRS notice.

What research makes you believe the income is subject to self-employment tax? Based on the information you've provided, I would tend to disagree. If you're looking for some authority, see the following US Tax Court case: Batok v. Commissioner, TC Memo. 1992-727 (http://taxpravo.ru/sudebnie_dela/statya ... ted_States)

Here are some relevant excerpts from the case:
We first decide whether the payment received from M. David Paul constitutes self-employment income within the meaning of section 1401 and is subject to self-employment tax. 3 Section 1402(a) defines "net earnings from self-employment" subject to tax to mean "the gross income derived by an individual from any trade or business carried on by such individual, less the deductions *** which are attributable to such trade or business". Section 1402(c) provides that the term "trade or business", as used for purposes of the self-employment provisions, generally has the same meaning as when used with respect to section 162.
Generally, to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity, regularity, and the taxpayer's purpose must be for income or profit. A sporadic activity, hobby, or amusement does not qualify. Commissioner v. Groetzinger [87-1 USTC ╤ 9191], 480 U.S. 23, 35 (1987). The Supreme Court has further stated that whether a taxpayer is engaged in a trade or business is a question of fact. Higgins v. Commissioner [41-1 USTC ╤ 9233], 312 U.S. 212, 217 (1941).
We believe that petitioner's installation of windows for M. David Paul 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 M. David Paul.

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Kevin M
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Re: Turbo Tax Woes: Other Income vs Independent Contractor

Post by Kevin M » Thu Mar 08, 2012 5:23 am

Well, the tax advice you just got is impressive. I would have thought that this income would be subject to self-employment tax; since no employer was paying SS tax and neither were you, you gotta pay, but that's just common sense, not tax law knowledge.

What I do is pay $45 or whatever it is for TT Audit Defense. So, if things like this come up, I just let them handle it. They've handled a couple of IRS notices for me, and in each case, they did a fine job and saved me time in writing letters or waiting on hold on the phone. On the other hand, I have handled a few correction notices myself, one quite complicated, and it worked out, but I had to do a lot of homework.

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damjam
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Re: Turbo Tax Woes: Other Income vs Independent Contractor

Post by damjam » Thu Mar 08, 2012 10:27 am

jared wrote: If you're looking for some authority, see the following US Tax Court case: Batok v. Commissioner, TC Memo. 1992-727
AFAIK, this is a memorandum opinion and as such can not be sited as a legal precedent. I would be very wary if your going to use this avenue.

As far as Turbo Tax is concerned, I share your disappointment. I keep hearing it's great if you have a "simple" return. Could someone define a simple return? It seems like the income item you describe should be routine and "simple."

montesquieu
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Re: Turbo Tax Woes: Other Income vs Independent Contractor

Post by montesquieu » Thu Mar 08, 2012 11:10 am

I hold no particular brief for TurboTax but this isn't a bug or an occasion for disappointment.

TurboTax has a routine of asking questions, which when answered point to a reasonable conclusion, regarding whether income is from "self-employment". One can see that the questions asked are designed to apply the principle from the Groetzinger case referenced in Jared's link. Whether the actual case cited is binding, or displayed on a Russian website, shouldn't matter at this point, if it helps us to figure out what "self-employment" means.

IRS routinely questions returns which report 1099-MISC non-employee compensation income as "other income". Write them a letter explaining why your wife's translation job was a sporadic activity or hobby, and not an activity carried on with continuity, regularity, and profit motive. If that is not the case, pay the deficiency.

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damjam
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Re: Turbo Tax Woes: Other Income vs Independent Contractor

Post by damjam » Thu Mar 08, 2012 11:32 am

montesquieu wrote: Whether the actual case cited is binding, or displayed on a Russian website, shouldn't matter at this point, if it helps us to figure out what "self-employment" means.
I've seen many citations for this case on the web, including on a Russian website. However it is oddly missing on the United States Tax Court website. Hmmm.

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Re: Turbo Tax Woes: Other Income vs Independent Contractor

Post by Sidney » Thu Mar 08, 2012 11:37 am

If I were an auditor I would ask if she engaged in this activity with the expectation of not making a profit. If so, then it might be considered a hobby. For example, does she do this for free for other people or for her own enjoyment. Is there any evidence that this type of activity is not intended to be a money making activity, irrespective of how often it is done.
I always wanted to be a procrastinator.

jared
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Re: Turbo Tax Woes: Other Income vs Independent Contractor

Post by jared » Thu Mar 08, 2012 11:47 am

damjam wrote:
jared wrote: If you're looking for some authority, see the following US Tax Court case: Batok v. Commissioner, TC Memo. 1992-727
AFAIK, this is a memorandum opinion and as such can not be sited as a legal precedent. I would be very wary if your going to use this avenue.
Sorry, I disagree with you. There is no need to be "very wary" of using this avenue. Please see the following information provided on US Tax Court site (my emphasis in bold): http://www.ustaxcourt.gov/taxpayer_info ... htm#AFTER4
C. Tax Court Opinion or Memorandum Opinion - The Chief Judge decides whether an opinion in a regular case will be issued as a Memorandum Opinion or as a Tax Court Opinion.

Generally, a Memorandum Opinion is issued in a regular case that does not involve a novel legal issue. A Memorandum Opinion addresses cases where the law is settled or factually driven. A Memorandum Opinion can be cited as legal authority, and the decision can be appealed. A Memorandum Opinion is cited as [Name of Petitioner] v. Commissioner, T.C. Memo. [year issued - #].

Generally, a Tax Court Opinion is issued in a regular case when the Tax Court believes it involves a sufficiently important legal issue or principle. A Tax Court Opinion can be cited as legal authority, and the decision can be appealed. A Tax Court Opinion is cited as [Name of Petitioner] v. Commissioner, [Volume of Tax Court Reports] T.C. [page of the volume] (year issued).
Perhaps you are confusing this with a Summary Opinion, which cannot be relied on as precedent. All of the Summary Opinion's I've read clearly state the following in the case:
PURSUANT TO INTERNAL REVENUE CODE SECTION 7463(b),THIS OPINION MAY NOT BE TREATED AS PRECEDENT FOR ANY OTHER CASE.


Also, from the same link above:
B. Summary Opinion - A Summary Opinion is issued in an S case. A Summary Opinion cannot be relied on as precedent, and the decision cannot be appealed.
damjam wrote: I've seen many citations for this case on the web, including on a Russian website. However it is oddly missing on the United States Tax Court website. Hmmm.
There's nothing odd about it. At the top of the search tool, it clearly states:
TC and Memorandum Opinions starting 09/25/95; Summary Opinions starting 01/01/01*
The Batok case is from 1992.

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damjam
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Re: Turbo Tax Woes: Other Income vs Independent Contractor

Post by damjam » Thu Mar 08, 2012 11:53 am

jared
Thank you for you thorough response.
This is part of the reason I really appreciate this forum.
damjam

2sls
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Re: Turbo Tax Woes: Other Income vs Independent Contractor

Post by 2sls » Thu Mar 08, 2012 5:02 pm

Did your wife receive a 1099-MISC with the amount reported in box 7 (Nonemployee Compensation)? If so, this is probably what triggered the IRS notice.
Yes we received this exactly and thank you Jared for providing the link.

At face value it seems that the work she did would qualify as a "sporadic event" since this was truly a one time activity and totally unrelated to her actual job. . As far as expectation of payment, I imagine she knew she wasn't working for free but more of a favor to the professor who also offered to compensate her- she doesn't do translations as a hobby and she wasn't actively seeking this type of work.

I guess based on the feedback here, it's probably worth my time to write a letter to the IRS explaining this.

I was ready to just mail a check in but I was really unhappy with myself since I never got a letter from them before and figured I should do some research to see where the source of ambiguity came from.

jared
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Re: Turbo Tax Woes: Other Income vs Independent Contractor

Post by jared » Thu Mar 08, 2012 6:44 pm

damjam wrote:jared
Thank you for you thorough response.
This is part of the reason I really appreciate this forum.
damjam
You're welcome. I enjoy contributing to the forum when I have something valuable to contribute. Like you, I really appreciate this forum and online community of people that make it so great. It's amazing what I've learned from the knowledgable folks on this forum over the last several years.

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Re: Turbo Tax Woes: Other Income vs Independent Contractor

Post by Muchtolearn » Thu Mar 08, 2012 8:29 pm

To me this seems like pure Schedule C income.

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Kevin M
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Re: Turbo Tax Woes: Other Income vs Independent Contractor

Post by Kevin M » Thu Mar 08, 2012 9:07 pm

jared and others who say this does not need to be reported on Schedule C and have SE tax paid: Say a student does a summer internship, gets paid a daily stipend, and it is reported on 1099-MISC. Do you think this qualifies as a sporadic activity (or otherwise not part of a trade or business), and could simply be reported as other income and not pay SE tax?

This was the case for my daughter a couple of years ago, and we filed a Schedule C for her. Can't remember if TurboTax led us there, or if I decided this was necessary based on reading the IRS pubs.

Just googled it, and found this on the IRS web site. According to this doc this income should be reported on Schedule C.
Mia is a 24 year old college student who did some part-time web development work over the summer.

She loved the job because she could do it late in the evening which is the best time for her to get work done. Her boss didn't care when or where she got the work done as long as it was done by a certain date.

She received a 1099-Misc for the $10,000 she earned and doesn't know what it is or what to do with it.

How should Mia report her income?

Since Mia was able to do the work whenever she wanted and wherever she wanted, this is income that she received as an independent contractor, and therefore it should be reported on Schedule C subject to self-employment taxes. She can offset it with any expenses she incurred while doing the work.
Kevin
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2sls
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Re: Turbo Tax Woes: Other Income vs Independent Contractor

Post by 2sls » Thu Mar 08, 2012 10:43 pm

I spent 2 hours on the phone with the IRS tax law department (self-employment tax division). The woman was specifically aware of the keywords: sporadic activity and all the other nice words people mentioned (continuity, regularity, and profit motive). She said she agreed with my interpretation and would make notes to my account for when I submit my page 3 response to their examination.

Also and while this is a specific example, there is a big difference between web development for money and doing ad hoc translations- anybody who does web development commercially presumably had intentional prior experience.

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