Side income tax reporting question (resolved)

[student]

I thought I have asked this question on this board before but I could not find the post. (It is possible that I simply asked my colleagues at work and I did not post the question here.) I am a college professor and I am involved in editorial work for a journal. Currently it is setup like any funded research with the entire amount ($3,000 to $3,500 a year) going to the university to support approved items such as conference travel and other editorial expenses. Due to the pandemic, I did not do any conference travel for almost 3 years and the account has accumulated about $12,000. Going forward, I may cut back on conference travel and there is not much on editorial expenses, so the money is just sitting there. I am wondering whether it is worthwhile to pursue a possible arrangement so that this becomes an income producing side project.

Cons of the potential new arrangement:
(1) Need to pay income tax on it, as it is now income, and not for reimbursement of approved activities.
(2) Need to pay social security tax on it (12.4%).
(3) Extra paperwork at tax time.

I could setup a SEP IRA but my understanding is that the limit is 25% of the income, so it won't avoid paying tax on this income (after deduction of editorial expenses). If it is $10,000, I will definitely pursue this alternate arrangement as I won't spend that much per year on research support/editorial expenses. Any comments and insights? Anything that I have missed?

Thanks.

Edit: It seems that I did a sloppy job in explaining the situation, and it had led to some misunderstanding. (Sorry.) So I have edited the post.

Update: I double checked the language. The publisher's offer was to reimburse expenses for editorial related duties including conference travel. So pursuing a possible new arrangement will simply complicate things and they may not accept it, so it is likely not productive. I will keep the current arrangement.

[secondcor521]

It sounds to me like they're compensating you for work. So I think you probably should have been reporting the honoraria as income in the years you've received it, either as other income on Schedule 1, or a Schedule C business, depending on the nature of your work arrangement.

It also sounds like you may be donating that money to the university or using it for personal development. You might be able to claim either a charitable contribution or educational expenses depending on what the funds were used for and the nature of that university research account (a topic about which I know zero).

I don't know who gave you the advice that led you to believe what you wrote about no tax being due under the current arrangement, but that advice seems really inaccurate to me.

I would recommend consulting with a local qualified tax preparer such as a CPA to discuss the details. If I am right (and sometimes I am), then the right thing to do would be to amend your prior federal and any applicable state tax returns for the last three years and pay the increased income taxes.

HTH.

[GreendaleCC]

It sounds to me like they're compensating you for work. So I think you probably should have been reporting the honoraria as income in the years you've received it, either as other income on Schedule 1, or a Schedule C business, depending on the nature of your work arrangement.

It also sounds like you may be donating that money to the university or using it for personal development. You might be able to claim either a charitable contribution or educational expenses depending on what the funds were used for and the nature of that university research account (a topic about which I know zero).

To me, it sounds like OP worked for free and the journal made a donation to the university.

[student]

It sounds to me like they're compensating you for work. So I think you probably should have been reporting the honoraria as income in the years you've received it, either as other income on Schedule 1, or a Schedule C business, depending on the nature of your work arrangement.

It also sounds like you may be donating that money to the university or using it for personal development. You might be able to claim either a charitable contribution or educational expenses depending on what the funds were used for and the nature of that university research account (a topic about which I know zero).

I don't know who gave you the advice that led you to believe what you wrote about no tax being due under the current arrangement, but that advice seems really inaccurate to me.

I would recommend consulting with a local qualified tax preparer such as a CPA to discuss the details. If I am right (and sometimes I am), then the right thing to do would be to amend your prior federal and any applicable state tax returns for the last three years and pay the increased income taxes.

HTH.

The current arrangement is legit and it is a common practice in academia. Other editors that I have talked to have similar arrangements at their universities. I worked with the controller's office. I believe this is considered I, as an university employee, is providing service to the publisher. It is similar to sponsored research from government. The money is not payable to me but payable to the university. The university simply agrees to use the money to support my research and every cent I spend is subject to the university's approval. If the university decides not to honor its commitment and not use the money for my research, I have no recourse.

[jfave33]

Yes sounds to me like you should be paying tax on it too. But I guess it depends on the contracts involved. Is the contract with you or the university? Who owns the work you or the university? Can the university take the funds and use them elsewhere? Can you withdraw the funds for any reason? etc etc. If you can get them to pay you directly for your own use it sounds like you are in control and should be paying tax regardless of where the money goes. I'm surprised the college legal team isn't involved if it is with them.

[student]

Yes sounds to me like you should be paying tax on it too. But I guess it depends on the contracts involved. Is the contract with you or the university? Who owns the work you or the university? Can the university take the funds and use them elsewhere? Can you withdraw the funds for any reason? etc etc. If you can get them to pay you directly for your own use it sounds like you are in control and should be paying tax regardless of where the money goes. I'm surprised the college legal team isn't involved if it is with them.

No. I cannot withdraw the money for any reason. It is treated like any sponsored research. The money is not payable to me but payable to the university. The university simply agrees to use the money to support my research and every cent I spend is subject to the university's approval. If I said I want to fly first class to a conference, they will say no. If I want to stay an extra day after the conference, the answer is no. It is for related editorial expense and research conference travel. If the university decides not to honor its commitment and not use the money for my research, I have no recourse.

[secondcor521]

The current arrangement is legit and it is a common practice in academia. Other editors that I have talked to have similar arrangements at their universities. I worked with the controller's office. I believe this is considered I, as an university employee, is providing service to the publisher. It is similar to sponsored research from government. The money is not payable to me but payable to the university. The university simply agrees to use the money to support my research and every cent I spend is subject to the university's approval. If the university decides not to honor its commitment and not use the money for my research, I have no recourse.

As I said originally, I'm not familiar with that arrangement.

I'll take your word that it is common. Many incorrect tax practices are common. That does not make them right.

I note your second assertion that it is legit. I do not know which source you are relying on to make those assertions. You very well may be right; I have no idea. But it still doesn't sound correct to me. In general the IRS taxes work which results in payment from which one receives individual benefit, which is why I recommended getting tax advice from a qualified tax preparer.

If it were me, I would at least want to be able to point to some section of tax code or IRS publication that says the kind of arrangement you have is excluded from tax because it is, for example, a gift or an inheritance or reimbursement for volunteering or some other excluded category. Especially if you're talking about thousands of dollars of income per year.