1099 Misc Question

[ETax847]

New client works for a law firm as a w2 employee.  He referred business to another attorney at a different firm and is going to receive a 1099 misc for the referral bonus.  Will this bonus be subject to self-employment tax as this is a one time occurrence? Or should it be treated as other income and no sch c needed?

 

Any help would be greatly appreciated

[Catherine]

Who is paying the bonus?  If it's his employer, it should be on a W-2.  If it is the other firm, my first thought is Line 21 other income as he is not in the business of referring out business to other companies.

[ETax847]

The bonus is being paid by the firm that received the referral (not his employer), sorry for the ommission.  

[Jack from Ohio]

New client works for a law firm as a w2 employee.  He referred business to another attorney at a different firm and is going to receive a 1099 misc for the referral bonus.  Will this bonus be subject to self-employment tax as this is a one time occurrence? Or should it be treated as other income and no sch c needed?

 

Any help would be greatly appreciated

 

Who is paying the bonus?  If it's his employer, it should be on a W-2.  If it is the other firm, my first thought is Line 21 other income as he is not in the business of referring out business to other companies.

 

The bonus is being paid by a third party firm (not his employer)

I agree with Catherine.  Line 21 NOT subject to SE.  See my later posts... 

 

Edited 1-10-15

[ETax847]

Thanks guys! This forum has been a great resource.

[RitaB]

I agree with my esteemed peers since OP said it's a one time occurrence.  I would add that if the 1009-Misc shows the compensation in box 7, IRS might expect to see a Sch C.  You can keep them happy by entering the amount as income on Sch C, then zero it out by entering the expense on p. 2 of Sch C with an explanation:  "Income not subject to self-employment tax and properly entered on Form 1040, line 21" or something real smart like that.

[Max W]

Maybe.

If he is an attorney, then he is a legal professional and referral fees are subject to SE.

If he is an employee in another capacity, office manger, administrator, etc. then the argument for Line 21 might carry some weight.

[Bart]

Maybe.

If he is an attorney, then he is a legal professional and referral fees are subject to SE.

If he is an employee in another capacity, office manger, administrator, etc. then the argument for Line 21 might carry some weight.

He is a professional attorney not a professional person who refers.

[Pacun]

How much bonus was reported on 1099?

Are we talking about $300 which I would use Sch C regardless to avoid the matching letter or are we talking about $20000 which would make a difference if reported on line 21 vs sch C.

 

Is the attorney making $150,000 on his regular job so reporting $20,000 on schedule C will not be as bad as if he makes only $80K on his W2.

[kcjenkins]

I'm afraid I have to agree with Bart, as an attorney, professional referrals are a normal part of business.  Common to refer to a specialist a case that is outside of your areas of expertise, and for them to pay a referral fee.  So I would include it as SE income.

 

From the Attorneys Audit Technique Guide

 

Referral Fee

This is a fee paid to an attorney who refers a case to another attorney. This generally occurs when an attorney receives a case that could be better handled by another attorney due to his area of specialty or because of his geographic location. A portion of the ultimate award is generally remitted back to the attorney that originated the case or referred the client. Examiners should ask an attorney whether or not they have referred any cases to another attorney. These fees represent recognizable income when received.

[RitaB]

Now would be a good time to find out if the "W-2 employee of the tax firm" is an attorney.  I didn't understand that to be the "case".

 

Regardless of job title, I am wondering if this compensation might be a first time occurrence rather than a one time occurrence.  And, a service was provided to the issuer of the 1099-Misc, so... 

 

 

[Lion EA]

It was an employee of a law firm referring a client to an attorney at a different law firm.  So, ETax 847, is your client a lawyer or a secretary or...?

[ETax847]

Client is an attorney at his firm.  In ten years of practicing law there, this is the first time he has received a referral bonus from an outside law firm.

[RitaB]

From Instructions for Form 1099-Misc:   http://www.irs.gov/instructions/i1099msc/ar02.html#d0e900

 

Self-employment tax.   Generally, amounts reportable in box 7 are subject to self-employment tax. If payments to individuals are not subject to this tax and are not reportable elsewhere on Form 1099-MISC, report the payments in box 3. However, report section 530 (of the Revenue Act of 1978) worker payments in box 7.

 

Examples.   The following are some examples of payments to be reported in box 7.

• Professional service fees, such as fees to attorneys (including corporations), accountants, architects, contractors, engineers, etc.

• Fees paid by one professional to another, such as fee-splitting or referral fees.

[homebuilder_watcher]

Any thoughts on this one. Person is an attorney not in private practice but working for  a corporation. Friend needs a PI attorney and asks person to recommend someone. Matter is settled and the corporate attorney winds up getting a referral fee. Is there a position to take that this is not SE income subject to SE tax because the attorney is not a practicing attorney (although licensed)?

[ILLMAS]

All the attorneys I know report referral income and pay SE tax,why should they make an exception for a w-2 employee?

[Jack from Ohio]

Subject to SE.  It is compensation for performing his job.  You would have a VERY tough time arguing against that under audit.

 

Changed my mind after research and information learned since my first post.

[jklcpa]

Any thoughts on this one. Person is an attorney not in private practice but working for  a corporation. Friend needs a PI attorney and asks person to recommend someone. Matter is settled and the corporate attorney winds up getting a referral fee. Is there a position to take that this is not SE income subject to SE tax because the attorney is not a practicing attorney (although licensed)?

 

Your friend should discuss this with his tax professional so that they can discuss the proper reporting of this income.

 

Beyond what's already been posted, you won't get help here because this is a forum for tax professionals using the ATX tax software sold by CCH.  

[homebuilder_watcher]

Thanks ATX Guru and others. Actually, I am a tax professional, tax attorney and CPA 28 years. I work at a Fortune 500 company...we use Corptax. This forum actually came up on a search and was just curious to get other thoughts.  I do agree in general with your conclusions. It's actually black and white for attorneys who are practicing law per se and referring cases to other attorneys on a regular basis..that is actually very common and part of "their business". This fact pattern differs a bit from someone who has referred one case in his lifetime. Is that part of his "trade or business"?  It would definitely be a tough argument but we have an IRS in office in our office and I have worked with/against them for 28 years and love a good fight.  I have not got around to looking for cases at this point but might do that to see if I can find an once of grey. Give an a slight crack and I'm willing to fight.

[Pacun]

I think you could argue it that "it happens that the referral was law related" but in reality that was a coincidence. This leaves an aroma. Under the exact same circunstances, could you have gotten a similar referral fee for suggesting a DJ? Your changes of getting away with no paying SE would be greater if you got the referral fee for suggesting a certain phographer to Bill Gates for promoting of his "water" machine and getting a huge referral fee. I chose the water machine but you can chose Windows 10 for that matter.

 

Since you are an Attorney, would you add a note to the return letting the IRS know that you are taking a position of not paying SE taxes? Or would you like to have a good fight with IRS if by coincidence the return gets picked up from the 1% that are randomly audited?

[homebuilder_watcher]

That is a good question. I would probably disclose it

[DANRVAN]

 if I can find an once of grey. Give an a slight crack and I'm willing to fight.

I believe there is a dab of grey area here and I have not seen any authority cited; including the audit guide or the instructions for 1099-misc.  The audit guide is correct in stating that the referral is included in income but makes no reference to S.E. income.

 

In the OP the attorney is an employee of a firm.  I believe it is common practice for the firm to receive the referral fee rather than the e'e.  So if he receives one referral fee in ten years, it could be argued that was seperate from his "business" of being an employee of the law firm and instead was an isolated activity. Then you can look at Rev. Rul 58-112 for guidance:

 

 

"In Deputy v. duPont, 308 U.S. 488 (1940), Ct.D. 1435, 1940-1 C.B. 118, it is stated that carrying on a trade or business involves holding one's self out to others as engaged in the selling of goods or services. An isolated or occasional activity is not a business. However, an individual may engage in several trades or occupations either independent of, or in connection with, his principal business. Freedman v. Commissioner, 301 F.2d 359 (5th Cir. 1962); Joseph M. Philbin, 26 T.C. 1159 (1956)."

 

Once you have gotten over that hurdle, you can look at the other elements in determining if the fee is subject to SE income.

 

"Regularity of activities, frequency of transactions, and the production of income are, accordingly, important elements in determining whether an activity will be considered a trade or business for self-employment (SE) tax purposes." (Rev Rul 77-356)

 

 

Without knowing all the fact and circumstances I could not give an opinion.