"Thank You" Money

[G2R]

Weird situation (what else is new these days.)

Client worked for a company.  Covid hits and the company goes under.  She is laid off.  

The company hires another company to wind down the company's affairs and collect whatever outstanding invoices they could from customers.  My client offers to help in the collections.  There is no discussion of pay, no employment or contractor agreement at all.  She'd worked for company a long time and just wanted to help where she could after a sad ending to the company.  She never expected to be paid anything.  (Hand to God, she's a good, honest person.  There's nothing nefarious going on.) 

After three months of helping, the guy in charge says, thank you so much for everything you did, we couldn't have done it without you.  As a thank you, here's $50k!  

Fast forward to this tax season, as she's collecting her tax stuff, she calls the guy and asks if he's suppose to issue her a 1099.  He says, "I'm not filing one, don't worry about it."

So, what do I do?  She sort of worked for him, but sort of didn't.  Gift?  Other income?  NEC subject to SE tax? 

[DANRVAN]

2 hours ago, GGRNY said:

.  As a thank you, here's $50k!  

Wow!

 

2 hours ago, GGRNY said:

Gift?  Other income?  NEC subject to SE tax? 

A case could be made for either of those; but I would lean towards other income.

She was not in the business of  "offering to help out" and did not have a profit motive that would subject her to SE tax. So I see an argument against NEC.

There is certainly not an issue of an employee gift vs bonus here. 

However, while there is an element of gratuitousness,  the payment was in recognition of her efforts for the company in charge of the winding down process.

Since the payment was made in recognition of her efforts; at a minimum I would call it other income with out further research.

 

 

 

[Catherine]

I think I side with Dan; in some ways this is like winning a prize.  Not expected, not predictable, no for-profit motive.

[schirallicpa]

On 4/8/2021 at 8:35 PM, GGRNY said:

There's nothing nefarious going on

Interestingly - that's the 3rd time I've heard that not-so-common word this week!

 

[Lee B]

Not too many years ago I had a client who had a Espresso Drive Thru Stand Business a C Corporation with 8 locations.

She ended up selling off the locations piecemeal, 4 different transactions, since she wasn't able to sell the whole business in one sale.

Three of the transactions involved personal non compete agreements reported as Other Income on her 1040.

The IRS via letter contested the Other Income as reported, fortunately my client had just enough documentation to counter the IRS.

My point is that reporting this amount of money as Other Income not subject to SE Tax will quite likely prompt a letter.

How do you respond to the letter with nothing to document your position?

 

 

[Catherine]

4 hours ago, schirallicpa said:

Interestingly - that's the 3rd time I've heard that not-so-common word this week!

 

Ah, but how many times have you heard the word "contumelious"?  

[DANRVAN]

I have never heard of a situation like this addressed before.

I can't think of a case to compare it to. 

4 hours ago, Catherine said:

in some ways this is like winning a prize.  Not expected, not predictable, no for-profit motive.

I thought about that, but at first was thinking more along the line of a "nonprofessional" fiduciary or PR.

However, there is a difference here since the former employee was paid for her professional skills, whereas a PR can do very little for big $$$.

I can see factors against SE including:

1.  she did not expect to get paid, therefore no profit motive.

2.  it was a one time sporadic activity.

3.  she did not make any billings, track her hours or otherwise carry on the activity in a business like matter.

But on the other hand it could be argued that:

1.  after three months the activity was conducted in a continuous manner.

2. although there was not an agreement, it was likely she entertained the possibility of some compensation for performing work of critical importance to the company.

3. in the end she was rewarded for her professional skills.

2 hours ago, cbslee said:

My point is that reporting this amount of money as Other Income not subject to SE Tax will quite likely prompt a letter.

How do you respond to the letter with nothing to document your position?

I am not sure how likely the $50,000 will trigger an IRS letter, but I would sure document the facts and circumstances regardless of what position the taxpayer chooses to take.

It seems crazy that the company would pay out $50,000 and not issue a 1099.  It is hard to imagine that the payment was not deducted on their end, but that is beside the point.

I would not hesitate to report it as other income after explaining and documenting the SE aspect to the the client.

 

[Catherine]

2 minutes ago, DANRVAN said:

documenting the SE aspect

This bit is key.  Does she have emails to/from the new owners, expressing her surprise, or offering to help settle the affairs of the defunct company specifically making it a FREE help offer?  Get those, and save them to pdfs, with the headers and date information etc, now.  Then if/when a letter comes, that helps show it was an offer out of her goodness, and the money was an unexpected surprise.

[Slippery Pencil]

Did the employer file a gift tax for the $50K for what he seems to be claiming is a gift?  Not that it would matter, cash paid to employees are wages.  This should have been reported on her W2.

[G2R]

On 4/10/2021 at 1:56 PM, cbslee said:

My point is that reporting this amount of money as Other Income not subject to SE Tax will quite likely prompt a letter.

How do you respond to the letter with nothing to document your position?

I agree, I think it's a big red flag.  I have documented my own discussions with my client and asked she forward all written communication she had with the guy to detail the history of the payment and also detail her timeline of assistance for him. 

On 4/10/2021 at 4:40 PM, DANRVAN said:

1.  she did not expect to get paid, therefore no profit motive.

2.  it was a one time sporadic activity.

3.  she did not make any billings, track her hours or otherwise carry on the activity in a business like matter.

But on the other hand it could be argued that:

1.  after three months the activity was conducted in a continuous manner.

2. although there was not an agreement, it was likely she entertained the possibility of some compensation for performing work of critical importance to the company.

3. in the end she was rewarded for her professional skills.

I am not sure how likely the $50,000 will trigger an IRS letter, but I would sure document the facts and circumstances regardless of what position the taxpayer chooses to take.

It seems crazy that the company would pay out $50,000 and not issue a 1099.  It is hard to imagine that the payment was not deducted on their end, but that is beside the point.

I would not hesitate to report it as other income after explaining and documenting the SE aspect to the the client.

 

All points you've made are spot on.  It's why I'm struggling so much with the reporting.  

On 4/12/2021 at 3:13 AM, Slippery Pencil said:

Did the employer file a gift tax for the $50K for what he seems to be claiming is a gift?  Not that it would matter, cash paid to employees are wages.  This should have been reported on her W2.

I doubt a gift return was filed.  I struggle with my client being liable for all FICA when she didn't have a profit seeking motive or business structure of any kind. Clearly the guy did something wrong, but what is her obligation to correct it at her own expense (paying both ER & EE FICA)? 

[Gail in Virginia]

I understand not wanting her to have to pay all of the employment taxes BUT she expected to make -0-.  If she is in a 20% bracket, after paying SS, Medicare, and FIT, she will still net close to $33,000.  That is better than -0- in my book and at least in FL she won't have state income tax on top of that which would take another 5.75% if she were in VA. 

[G2R]

30 minutes ago, Gail in Virginia said:

I understand not wanting her to have to pay all of the employment taxes BUT she expected to make -0-.  If she is in a 20% bracket, after paying SS, Medicare, and FIT, she will still net close to $33,000.  That is better than -0- in my book and at least in FL she won't have state income tax on top of that which would take another 5.75% if she were in VA. 

Well she lives in NY sooo.... her taxes are worse than VA. :( 

I've explained her options and she's decided on the conservative route, she's filing as if she got a 1099-NEC.  Thanks everyone for the input. 

[G2R]

Taxpayer reached out to the guy that gave her the money and today he replied, "I should have given you a 1099-NEC, but I didn't.  You owe the SE tax."  

Now I'm wondering if I have an argument for filing it on a Sch C, and claiming QBID. 

[Lion EA]

Schedule C with Form 8919 plus Form SS-8 to save her half of the SE tax. Or do you use Form 4852 instead of Schedule C?

[Abby Normal]

You might want to split it into two portions, one that was reasonable compensation for work performed and the other....?? Gift??

[micpa]

"Helping" is clearly not taxable.........as long as you are a 501 (c) (3).  I have to get back to "helping" a client, I mean friend by answering some questions.....voluntarily.

[Lee B]

Even 501(c)3's have employees

[DANRVAN]

On 4/14/2021 at 3:23 PM, GGRNY said:

Now I'm wondering if I have an argument for filing it on a Sch C, and claiming QBID. 

Yes.  

The presumption of former employee rule would not apply here, since she is not performing the duties for the former employer.

[DANRVAN]

On 4/15/2021 at 6:54 AM, Abby Normal said:

and the other....?? Gift??

I had that thought, but where would you draw the line?

Although she might have set up to due this on a volunteer basis, once she accepted the $$,$$$, it became a payment for her services.

The excess over reasonable was a big fat bonus.

[DANRVAN]

On 4/14/2021 at 5:38 PM, Lion EA said:

Form SS-8 to save her half of the SE tax.

Might have case there.  But why fight over it when she expected zero payment to begin with?

 

[Catherine]

As soon as the giver said "I should have sent a 1099-NEC" it turned into self-employment on Sch C.  The good news is that she can now deduct her mileage to and from, and any out of pocket expenses.