Miscellaneous or self-employment income?


J

Jonathan Kamens

Earlier this year, I published a free add-on for the Mozilla
Thunderbird email client
(https://addons.mozilla.org/en-US/thunderbird/addon/195275/).
The Mozilla add-ons Web site allows add-on developers to
request donations from people who find the add-on useful;
donations are entirely optional.

I have a full-time job which has nothing to do with this
add-on. That's a good thing, since I've received <$200 in
donations from the add-on, which is hardly enough to live on.
;-)

Do I report this income as miscellaneous income subject to
only income tax, or as self-employment income subject also to
both employer's and employee's shares of FICA and Medicare
tax? In general, what distinguishes between these two types of
income?

Two more examples:

1. My synagogue pays members a small honorarium for reading
from the Torah on the Sabbath (preparing for Torah reading is
a time-consuming process, for which the honorarium is meant to
compensate). I read from the Torah once a year. Miscellaneous
or self-employment income?

2. My wife is on the board of a local non-profit community
organization. They pay board members a small stipend for each
board meeting they attend. Miscellaneous or self-employment
income?

Thanks,

Jonathan Kamens
 
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A

Arthur Kamlet

Earlier this year, I published a free add-on for the Mozilla
Thunderbird email client
(https://addons.mozilla.org/en-US/thunderbird/addon/195275/).
The Mozilla add-ons Web site allows add-on developers to
request donations from people who find the add-on useful;
donations are entirely optional.

I have a full-time job which has nothing to do with this
add-on. That's a good thing, since I've received <$200 in
donations from the add-on, which is hardly enough to live on.
;-)

Do I report this income as miscellaneous income subject to
only income tax, or as self-employment income subject also to
both employer's and employee's shares of FICA and Medicare
tax? In general, what distinguishes between these two types of
income?
Welcome to the world of "trade or business."

If your activity involves a trade or business, it is
reported as a business activity, preferably on Schedule C and
if necessary, Schedule SE.


If a trade or business, you get to reduce your income by your
allowed trade or business expenses all on Schedule C.


If the result is a gain, Sch SE also calculates your FICA and
Medicare taxes. Different businesses/SchC's can all flow
into one Sch SE.

If not a trade or business, report income on Form 1040 line 21 and
expenses as Misc 2% Deductions on Schdule A, not to exceed the income
reported.


So all you have to do is decide if it is a trade or business, right?

Here are two marginally helpful links:

http://www.irs.gov/charities/article/0,,id=158841,00.html

http://taxguide.completetax.com/text/Q11_2100.asp


If you have a profit motive, engage in this activity
more than just once or twice, and end up with a profit,
there's a real good chance it is a trade or business.

Sounds to me just from what you wrote that your software
work, plus placing your hat on the sidewalk asking for money
from anyone happy with your product, is not a short one-time
activity and would be a trade or busimess. The more often
you do this the more convincing the argument becomes.

Two more examples:

1. My synagogue pays members a small honorarium for reading
from the Torah on the Sabbath (preparing for Torah reading is
a time-consuming process, for which the honorarium is meant to
compensate). I read from the Torah once a year. Miscellaneous
or self-employment income?

Even allowing for an argument that you are paid for your
preparation time and not for reading on the Sabbath, the
answer comes down to whether this is a one-time or two-time
activity or more regular.

2. My wife is on the board of a local non-profit community
organization. They pay board members a small stipend for each
board meeting they attend. Miscellaneous or self-employment
income?

Director's fees are Schedule C activities (Pub 525). If all her
Schedule C profits are under $434, no SE tax, else SE tax as well.

Same statement for you.


Each of you have at least one Scheddule C and, if necesary, each
of you has your own Schedule SE.
 
M

Mark Bole

Earlier this year, I published a free add-on for the Mozilla
Thunderbird email client
(https://addons.mozilla.org/en-US/thunderbird/addon/195275/).
The Mozilla add-ons Web site allows add-on developers to
request donations from people who find the add-on useful;
donations are entirely optional.

I have a full-time job which has nothing to do with this
add-on. That's a good thing, since I've received<$200 in
donations from the add-on, which is hardly enough to live on.
[...]

So all you have to do is decide if it is a trade or business, right?

Here are two marginally helpful links:

http://www.irs.gov/charities/article/0,,id=158841,00.html

http://taxguide.completetax.com/text/Q11_2100.asp

I'm surprised you didn't post a link to the "nine factors", which is
what I would address were I preparing a return in this situation. In
other words, to document my due diligence I would focus on questions and
answers related to these factors.

The nine factors are found in Treas. Regs. §1.183-2(b)(1) through (9),
also listed in Ch. 1 of Pub 535.

Here is a link to IRS audit techniques around how they might inquire
about each of these nine factors. You can get a flavor of the types of
facts and circumstances that might apply to your situation by reading
the questions.

http://www.irs.gov/businesses/small/article/0,,id=208400,00.html#appendix02

If you have a profit motive, engage in this activity
more than just once or twice, and end up with a profit,
there's a real good chance it is a trade or business.

Time spent on the activity, and the amount of profits, if any, are two
of the nine factors in determining profit motive.

Sounds to me just from what you wrote that your software
work, plus placing your hat on the sidewalk asking for money
from anyone happy with your product, is not a short one-time
activity and would be a trade or busimess. The more often
you do this the more convincing the argument becomes.

I would conclude perhaps the opposite, based on the very limited
information we have. Does someone with a profit motive merely put a
"hat on the sidewalk asking for money"? No, they advertise or promote
their product and do their utmost to collect revenue from customers.

He clearly is not relying on this activity for his livelihood, and
probably has no significant financial investment in it. There may well
be a strong element of personal pleasure or recreation (the software
creative process, and "bragging rights" in the world of software geeks).

There is no formula, but again I would focus on the nine factors.

Even allowing for an argument that you are paid for your
preparation time and not for reading on the Sabbath, the
answer comes down to whether this is a one-time or two-time
activity or more regular.

I'd call this a not-for-profit activity, looking at all nine factors.
Reasonable people might disagree.

Director's fees are Schedule C activities (Pub 525). If all her
Schedule C profits are under $434, no SE tax, else SE tax as well.

Same statement for you.
The pub refers to "corporate directors", is the local non-profit
community organization a corporation?

I recall that Harlan Lunsford once proposed here that one
easily-achieved piece of tax simplification would be to raise the SE
threshold on Sched. C activities from $400 (net) to $1,000, and then
maybe index it for inflation. This might increase compliance and give
the IRS more accurate data for refining their audit techniques, further
helping close the tax gap.


-Mark Bole
 
R

removeps-groups

Earlier this year, I published a free add-on for the Mozilla
Thunderbird email client
(https://addons.mozilla.org/en-US/thunderbird/addon/195275/).
This looks like a nice addon. I will try it out. How about an option
like send at half past the hour, that way all your mail will be sent
in one batch?
The Mozilla add-ons Web site allows add-on developers to
request donations from people who find the add-on useful;
donations are entirely optional.

I have a full-time job which has nothing to do with this
add-on. That's a good thing, since I've received <$200 in
donations from the add-on, which is hardly enough to live on.
;-)

Do I report this income as miscellaneous income subject to
only income tax, or as self-employment income subject also to
both employer's and employee's shares of FICA and Medicare
tax? In general, what distinguishes between these two types of
income?
Sounds like the former to me (Other Income, line 21) as you don't
intend to make a business out of it. The donations are just a little
pocket money. Search in the internet for "business versus hobby" to
find answers to your general question.

If this were a Schedule C business you probably would have no profit
anyway because you'd be deducting electricity for business use of your
computer, depreciation on the purchase price of your computer by the
percentage of business use, business license, liability insurance, etc
all of which are surely more than $200 for the year. Besides, if your
Schedule C business makes less than around $400 a year, you pay no SE
tax (another very strange rule to me because the time cost of filing
out form SE is truly negligible).

As a hobby, you can still deduct expenses but subject to 2% of AGI.
So if you make 100k, only expenses above 2k are deductible -- but
expenses include all unreimbursed employee expenses, all tax expenses
like amounts you pay a tax preparer or a professional to manage your
money, etc. And remember, if you're in AMT, then you don't get to
deduct the expenses at all because the deduction is not allowed under
AMT, and while your regular tax will decrease by say $500 because of
the deduction, your AMT tax will increase by the same amount. AMT can
hit single people making 150k or more, or married couples making 200k
or more, but in theory it can affect someone making 50k, depends on
state you live in, etc. I haven't been able to figure it out.

If I wrote that addon and got just $200, I probably wouldn't even
bother reporting it.

Two more examples:

1. My synagogue pays members a small honorarium for reading
from the Torah on the Sabbath (preparing for Torah reading is
a time-consuming process, for which the honorarium is meant to
compensate). I read from the Torah once a year. Miscellaneous
or self-employment income?
SE income in my opinion because you do it on a regular basis -- namely
once a year. Then again, once a year is not frequent enough, so I
could be wrong, and besides there's no formal business involved, no
advertising, etc.
2. My wife is on the board of a local non-profit community
organization.  They pay board members a small stipend for each
board meeting they attend. Miscellaneous or self-employment
income?
SE income.
 
J

Jonathan Kamens

If you have a profit motive, engage in this activity
more than just once or twice, and end up with a profit,
there's a real good chance it is a trade or business.
Hmm.

If by "profit motive" you mean "in it for the money," then
I'm not really sure that's accurate.

* I've been writing and distributing free software for over two
decades for no compensation at all.

* If the Mozilla Web site didn't allow me to ask for
donations, I would have written and distributed this software
anyway. I wrote it because I needed it; being able to
distribute it to others who also find it useful is just a
fringe benefit.

* I don't expect the money I get from the software to ever
come anywhere close to adequately compensating me for the time
I've spent working on it, which has surely been enough hours
that the donations come to far under the minimum wage.

* If I had a "profit motive," I could have taken those hours
and devoted them to my day job instead, which would have
improved by career (and salary) advancement.

If I quit my day job and worked full-time developing and
releasing Mozilla add-ons, then that would be a pretty good
sign that I had a profit motive, but as things are now, I
don't think that's the case.
Even allowing for an argument that you are paid for your
preparation time and not for reading on the Sabbath, the
answer comes down to whether this is a one-time or two-time
activity or more regular.
Like I said, I only do it once a year, on the anniversary of
my bar mitzvah. I would do it even if they didn't pay me. I
didn't even know they paid until I got a check in the mail
after the first time. There are other, more frequent Torah
readers for whom this is an actual source of income, and it
takes long enough to prepare for each reading that the
synagogue needs to pay to get enough readers, but I'm not in
that category. I actually usually send whatever they pay me
back to the synagogue as a donation.

So no, I really don't think there's a profit motive here
either.

But I suppose in both of these cases, I don't have to convince
you -- I have to convince the IRS when they come auditing. :)

Thanks for the response.

jik
 
M

Mark Bole

Sounds like the former to me (Other Income, line 21) as you don't
intend to make a business out of it. The donations are just a little
pocket money. Search in the internet for "business versus hobby" to
find answers to your general question.

Or, just use the same nine factors that the IRS would use.


Besides, if your
Schedule C business makes less than around $400 a year, you pay no SE
tax (another very strange rule to me because the time cost of filing
out form SE is truly negligible).

I don't know the rationale behind the rule, but I don't think it has
anything to do with how costly it is to file the tax form.

If I wrote that addon and got just $200, I probably wouldn't even
bother reporting it.
It's taxable income.


SE income in my opinion because you do it on a regular basis -- namely
once a year. Then again, once a year is not frequent enough, so I
could be wrong, and besides there's no formal business involved, no
advertising, etc.
The amount of time spent on the activity is just one of nine factors.

SE income.
Wouldn't it depend on all the facts and circumstances?

-Mark Bole
 
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A

Arthur Kamlet

This looks like a nice addon. I will try it out. How about an option
like send at half past the hour, that way all your mail will be sent
in one batch?



Havn't looked at your link, but dos this work similar to the
shell at command?





For $200 total, and even adding the 100 for the baal kriah work,
there's no SE tax. Unless you have more han 2% of AGI worth
of deductions, there's no practical difference in SE vs Line 21.
 
A

Arthur Kamlet

Earlier this year, I published a free add-on for the Mozilla
Thunderbird email client
(https://addons.mozilla.org/en-US/thunderbird/addon/195275/).
The Mozilla add-ons Web site allows add-on developers to
request donations from people who find the add-on useful;
donations are entirely optional.

I have a full-time job which has nothing to do with this
add-on. That's a good thing, since I've received<$200 in
donations from the add-on, which is hardly enough to live on.
[...]

So all you have to do is decide if it is a trade or business, right?

Here are two marginally helpful links:

http://www.irs.gov/charities/article/0,,id=158841,00.html

http://taxguide.completetax.com/text/Q11_2100.asp

I'm surprised you didn't post a link to the "nine factors", which is
what I would address were I preparing a return in this situation. In
other words, to document my due diligence I would focus on questions and
answers related to these factors.

The nine factors are found in Treas. Regs. §1.183-2(b)(1) through (9),
also listed in Ch. 1 of Pub 535.

Here is a link to IRS audit techniques around how they might inquire
about each of these nine factors. You can get a flavor of the types of
facts and circumstances that might apply to your situation by reading
the questions.

http://www.irs.gov/businesses/small/article/0,,id=208400,00.html#appendix02





Good points. Thanks.


I would conclude perhaps the opposite, based on the very limited
information we have. Does someone with a profit motive merely put a
"hat on the sidewalk asking for money"? No, they advertise or promote
their product and do their utmost to collect revenue from customers.

Well, actually, yes. It's called busking, and is a very traditional
way to make a living :^)

We just returned from a Hawaiian cruise which included the mandatory
stopover in Ensanada, and there were buskers all over. Just walk
around Times Square or Michigan Avenue and in cities large and small
world wide and you'll see lots of buskers,
He clearly is not relying on this activity for his livelihood, and
probably has no significant financial investment in it. There may well
be a strong element of personal pleasure or recreation (the software
creative process, and "bragging rights" in the world of software geeks).

Surely no one would argue that a schedule c activity is one you
rely on for your livilihood?


I recall that Harlan Lunsford once proposed here that one
easily-achieved piece of tax simplification would be to raise the SE
threshold on Sched. C activities from $400 (net) to $1,000, and then
maybe index it for inflation. This might increase compliance and give
the IRS more accurate data for refining their audit techniques, further
helping close the tax gap.
Sounds good to me. Church employees have an even lower threshold.


It is a perfect example of an established de minimis amount.
 
R

removeps-groups

For $200 total, and even adding the 100 for the baal kriah work,
there's no SE tax. Unless you have more han 2% of AGI worth
of deductions, there's no practical difference in SE vs Line 21.
It's possible that the $200 is subject to SE tax. If the original
poster has another Schedule C business that generates $50,000 in
income, then he is already well above the threshold, and even another
$1 in income in another Schedule C will be subject to SE tax. My
assumption is that there is on Schedule SE despite the number of
Schedule C businesses, which seems right.
 
R

removeps-groups

On 2010/11/28 10:08, (e-mail address removed) wrote:

I don't know the rationale behind the rule, but I don't think it has
anything to do with how costly it is to file the tax form.
Then what could be the reason? I imagine in the old days if someone
made $200 in SE income you'd have to open the filing cabinet with
their social security earnings record and update it, but the amount is
so small that the cost to the IRS is great. Today with computers,
it's a whole different story.
It's taxable income.
Initially I said I wouldn't bother about it because the amount is so
small that the IRS probably wouldn't never find out about it, and the
cost for you to track these small amounts plus the expenses (which are
deductible on Schedule A for hobby subject to limits) is very great.

But then, it's known that prizes such as Nobel and Pulitzer prizes are
tax free. From publication 17 and 525:

<Quote source="http://www.irs.gov/publications/p525/
ar02.html#en_US_publink1000229575">

Pulitzer, Nobel, and similar prizes. If you were awarded a prize in
recognition of accomplishments in religious, charitable, scientific,
artistic, educational, literary, or civic fields, you generally must
include the value of the prize in your income. However, you do not
include this prize in your income if you meet all of the following
requirements.

1. You were selected without any action on your part to enter the
contest or proceeding.
2. You are not required to perform substantial future services as a
condition for receiving the prize or award.
3. The prize or award is transferred by the payer directly to a
governmental unit or tax-exempt charitable organization as designated
by you. The following conditions apply to the transfer.
1. You cannot use the prize or award before it is
transferred.
2. You should provide the designation before the prize or
award is presented to prevent a disqualifying use. The designation
should contain:
1. The purpose of the designation by making a reference
to section 74(b)(3) of the Internal Revenue Code,
2. A description of the prize or award,
3. The name and address of the organization to receive
the prize or award,
4. Your name, address, and taxpayer identification
number, and
5. Your signature and the date signed.
3. In the case of an unexpected presentation, you must return
the prize or award before using it (or spending, depositing, investing
it, etc., in the case of money) and then prepare the statement as
described in (b).
4. After the transfer, you should receive from the payer a
written response stating when and to whom the designated amounts were
transferred.

These rules do not apply to scholarship or fellowship awards. See
Scholarships and fellowships, later.

</Quote>

The $200 received is sort of an award. The addon is a charitable,
artistic, and civic accomplishment. The person who wrote the addon
did not have to pay to be a member of Thunderbird addon team, and is
under no obligation to perform future services. So if he assigned
that $200 to a charitable organization, then it would not be income to
him.

Now if he normally donates at least $200 a year to charity, then he
could donate $200 using the proceeds of addon reward, and $200 less
from his own funds.

Some might consider the $200 to not be an award. I consider it to be
an award because end users are voting for their addon by making $5
donations. But in case my reasoning is too far fetched, consider: all
donations to Thunderbird will be put into a fund, and then the money
distributed according to a panel that decides that merit of each
addon. The panel could very well be the end users themselves who
donated the money. Or maybe they could judge the merit of a product
by the number of downloads -- but many times people download a product
just to try it out. Or maybe there could be a true panel of judges.
 
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J

Jonathan Kamens

Initially I said I wouldn't bother about it because the amount is so
small that the IRS probably wouldn't never find out about it,
In other words, "It's OK to cheat on your taxes if you don't
get caught."
and the
cost for you to track these small amounts plus the expenses (which are
deductible on Schedule A for hobby subject to limits) is very great.
In other words, "It's OK to cheat on your taxes if it's too
much trouble to be honest."

I don't find the income to be hard to track at all, given that
(a) I actually keep decent financial records throughout the
year, and (b) all of the donations I'm receiving for the
software come in via Paypal and say explicitly what they were
for.

As for deductions, the ratio of time I spend working on the
software against all the time I spend working on my computer
is so low that it's hardly worth trying to deduct anything. I
will report and pay tax on the entire amount, with no
deductions, because that is both the ethically right and
legally required thing to do.
But then, it's known that prizes such as Nobel and Pulitzer prizes are
tax free.
No, they're not. They're only tax free in limited
circumstances which don't apply here (and don't apply to many
Nobel and Pulitzer winners).
Pulitzer, Nobel, and similar prizes. If you were awarded a prize in
recognition of accomplishments in religious, charitable, scientific,
artistic, educational, literary, or civic fields,
It is a stretch, at best, to say that the software people are
paying me for falls into any of those categories, and a
stretch to say that the money people have paid me was
"awarded" to me as a "prize in recognition of
accomplishments." I think it is clear from the wording that
the interpretation you are suggesting is not what was intended
by lawmakers.
you generally must
include the value of the prize in your income. However, you do not
include this prize in your income if you meet all of the following
requirements.
Note that it says ALL of the following requirements, and not
in particular the third requirment listed below:
1. You were selected without any action on your part to enter the
contest or proceeding.
2. You are not required to perform substantial future services as a
condition for receiving the prize or award.
3. The prize or award is transferred by the payer directly to a
governmental unit or tax-exempt charitable organization as designated
by you. The following conditions apply to the transfer.
In other words, a prize like the Nobel or Pulitzer is only
tax-free if you turn around and donate it to someone else. It
seems to me that the only point of this special case is so
that if you do choose to turn around and donate the prize, you
don't have to pay taxes on it even if your income is so high
that your itemized deductions are limited, or your income is
so low that the amount of the prize exceeds the ceiling for
charitable deductions, or you don't itemize your deductions.

In short, it's simply wrong to say that prizes like the Nobel
and Pulitzer are tax free; they are only tax free when you
give them away.

And since I'm not giving away the money that people are paying
me for the software I've written, but rather keeping it, this
is all irrelevant and the money is clearly taxable income
(probably misc. income, not SE income, judging from the
discussion here).
The $200 received is sort of an award.
No, it's not.
The addon is a charitable,
artistic, and civic accomplishment.
No, it's not.
The person who wrote the addon
did not have to pay to be a member of Thunderbird addon team, and is
under no obligation to perform future services. So if he assigned
that $200 to a charitable organization, then it would not be income to
him.
Who cares? How could this possibly matter? If I "asigned"
*any* of my income to a charitable organization by donating
it, I could deduct it and not pay taxes on it.

You've taken a very simple situation and for some reason
attempted to turn it into an extremely complex one. I can see
no reason why it is necessary or appropriate to do so.
Some might consider the $200 to not be an award. I consider it to be
an award because end users are voting for their addon by making $5
donations.
I'd like to see you try to make that argument in tax court.
It would be sort of funny to see how quickly it gets shot
down.

It is perfectly clear that neither Congress nor the IRS
intends the money people are paying me for my software to be
considered an "award," and I don't think the law is ambiguous.
 
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