Prizes/Awards and S/E Tax

[Dave T]

Potential new client comes with last years return.

I'm reviewing her 1099 Misc and notice that there are amounts in the non-employee compensation box and in the other income box. On the back of the 1099 is a breakdown of the other income items which represent awards for meeting various sales targets ( Pampered Chef ). These vary from mugs to Visa cash cards and also a trip among others.

The prior year preparer put all these on line 21 as other income and entitled it prizes, and I'm wondering if some or all of this should go on her Sch. C and be subject to S/E tax.

I saw a discussion of this recently on the board but don't remember the consensus as to how to report. In that particular case it was windows that were won in some type of contest.

Someone, I believe it was KC, mentioned an acronym of SPFF (?) and wasn't sure what that meant but do recall it had to do with this topic and that indeed it might be subject to S/E.

Thanks for any input.

Dave T

[kcjenkins]

True Spiff is not subject to SE tax, but this does not sound like spiff to me. Spiff is a sales incentive paid by an outside company, not the employer, and it is the lack of any direct connection between payer and payee that makes it exempt, basically. In this case, the 'prizes' were not shown in the box for prizes because they are directly tied to the performance of the worker. You could argue that they could have been shown in box 7, but, probably for internal accounting reasons, they were separated from the ordinary income, but still subject to SE tax. You are right, and the prior preparer was wrong, to put them on Line 21. The only prizes that go on Line 21 are those that have no relationship to the work of the taxpayer. Otherwise, whether it is called a prize, a bonus, a Christmas bonus, etc, it is still 'compensation' and subject to SE tax when it is paid because of the working relationship between payer and payee.

[BulldogTom]

But KC, pampered chef sales reps are Sch. C businesses, like avon. Those would be SPFF in my humble opinion because the company giving them is not related to the Sole Proprietor.

I vote for line 21.

Tom

Lodi, CA

[Lion EA]

No. It's compensation to the sole proprietor. SE income. She's in the business to receive income from Pampered Chef and receives more if meeting certain goals.

SPIFF comes from a manufacturer represented by an employer with an employer-employee relationship to the tax payer/employee. Then she's one stage removed from the manufacturer and does not pay SE on those incentives. SPIFF comes on a Form 1099-MISC for an employee who's working for W-2 income. Your client should receive her reporting on Form 1099-MISC from Pampered Chef.

[DANRVAN]

Definitely not SPIFF, prior preparer is wrong.

[kcjenkins]

Tom, if the 'prize' comes from Avon or an Avon subsidiary, it would go on the Sch C, not line 21. The fact that there is box 7 income on the SAME 1099 tells me it's not Spiff.

[Jack from Ohio]

Income derived from the operation of her business is business income and subject to SE.