Handling random earnings on taxes

[jflo]

If someone could point me to a good resource, I'd appreciate it.  In August, I got paid just under $2k for some work done on a lawsuit years ago that was finally wrapped up.  I was just given a check from one of the attorneys on the case so I'm expecting this will be filed as payment to an independent contractor.
Now I'm not sure how to handle this amount on my taxes - do I owe Medicare/SS as well as self-employment taxes?  I'm fine w/ whatever I owe - it wasn't planned money anyway.  It just seems weird running it through Turbo Tax w/ all of the questions about my business, so I want to make sure I'm not missing a simpler way to handle this.

[Jmoody10]

http://www.irs.gov/uac/Reporting-Miscellaneous-Income

You would need to report it as a business.

[MustachianAccountant]

Lawsuit income is not a special category of income. It depends what the money is replacing. If the damages you recovered are something that would have been self-employment income if the defendant had paid them voluntarily without the lawsuit, then it's self-employment income for tax purposes. If the damages are to compensate you for a physical injury, they are not replacing taxable income and so would not be taxable. Depending on the facts of the case, it could be harder to determine what the income is replacing.

For some help figuring it out, with many examples, see the IRS publication on this topic.

You're misunderstanding OP's situation. OP did some work for a lawyer, who then paid OP for that work.

jflo: Unfortunately, since you're using Turbo Tax, you'll have to step through all the questions to report it as a Schedule C business, because that's technically what it is. TT will then calculate your Self Employment tax, which includes Social Security and Medicare payments.

[jflo]

Thanks for the replies. Though I was hoping for something simpler, good to have the confirmation that I'm approaching this the right way (and yes, it was payment for services, not income from a lawsuit).
I really can't complain though - we've had to file with foreign income and rental property before, so we've already simplified our taxes quite a bit now that everything is US-based.

[MDM]

I was hoping for something simpler

Was this something you did in the course of running your own business?  Or was it more of a one-off thing?

E.g. see http://www.irs.gov/uac/Is-Your-Hobby-a-For-Profit-Endeavor%3F and http://www.irs.com/articles/tax-tips-people-who-earn-income-hobby.  If this is not business income, it goes on line 21 (Other Income) of form 1040 with the explanation "Not for Profit Activity Income" or similar.  Can't get much simpler if that applies in this case.

[MustachianAccountant]

I was hoping for something simpler

Was this something you did in the course of running your own business?  Or was it more of a one-off thing?

E.g. see http://www.irs.gov/uac/Is-Your-Hobby-a-For-Profit-Endeavor%3F and http://www.irs.com/articles/tax-tips-people-who-earn-income-hobby.  If this is not business income, it goes on line 21 (Other Income) of form 1040 with the explanation "Not for Profit Activity Income" or similar.  Can't get much simpler if that applies in this case.

This really doesn't pass the smell test for being hobby income. C'mon.

[MDM]

This really doesn't pass the smell test for being hobby income. C'mon.

The quotes "I got paid just under $2k for some work done" and "it wasn't planned money anyway" can be reasonably interpreted to mean this was a one-time deal and not part of the OP's normal business.  If so, it very much is "hobby income."  But that interpretation may not be correct, so it's back to the OP for clarification.

[MustachianAccountant]

This really doesn't pass the smell test for being hobby income. C'mon.

The quotes "I got paid just under $2k for some work done" and "it wasn't planned money anyway" can be reasonably interpreted to mean this was a one-time deal and not part of the OP's normal business.  If so, it very much is "hobby income."  But that interpretation may not be correct, so it's back to the OP for clarification.

Yeah, I'm still going to disagree with you there.
"a hobby is defined as an activity that you engage in 'for sport or recreation, not to make a profit.'"
OP called it "work" and I can't imagine anyone helps lawyers with court cases for "sport or recreation."
I also doubt OP would have done the work for free, and therefore was engaged in the work to make a profit.
Just because it was a one-off job, that doesn't suddenly make it hobby income.

[MDM]

Yeah, I'm still going to disagree with you there.
"a hobby is defined as an activity that you engage in 'for sport or recreation, not to make a profit.'"
OP called it "work" and I can't imagine anyone helps lawyers with court cases for "sport or recreation."
I also doubt OP would have done the work for free, and therefore was engaged in the work to make a profit.
Just because it was a one-off job, that doesn't suddenly make it hobby income.

As neither one of us knows the full story, until/unless the OP decides to elaborate, all this is speculation.  For the benefit of others, see http://www.irs.gov/pub/irs-pdf/p535.pdf (excerpt quoted below).  Many people want to characterize something as a business so they can deduct "business expenses."  Reading the list below, if one does something on a one-off basis it appears the IRS would say that is not a business, so expenses can't be deducted against other income.  In the OP's case, the "not a business" designation is exactly what will make things simpler.

Not­for­Profit Activities
If you do not carry on your business or invest­ment activity to make a profit, you cannot use a loss from the activity to offset other income. Ac­tivities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit.
...
In determining whether you are carrying on an activity for profit, several factors are taken into account. No one factor alone is decisive.
Among the factors to consider are whether:
  - You carry on the activity in a businesslike manner,
  - The time and effort you put into the activity indicate you intend to make it profitable,
  - You depend on the income for your liveli­hood
  - Your losses are due to circumstances be­yond your control (or are normal in the start­up phase of your type of business),
  - You change your methods of operation in an attempt to improve profitability,
  - You (or your advisors) have the knowledge needed to carry on the activity as a suc­cessful business,
  - You were successful in making a profit in similar activities in the past,
  - The activity makes a profit in some years, and
  - You can expect to make a future profit from the appreciation of the assets used in the activity

[MustachianAccountant]

As neither one of us knows the full story, until/unless the OP decides to elaborate, all this is speculation.

Agreed.

Not­for­Profit Activities
If you do not carry on your business or invest­ment activity to make a profit, you cannot use a loss from the activity to offset other income. Ac­tivities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit.
...
In determining whether you are carrying on an activity for profit, several factors are taken into account. No one factor alone is decisive.
...

The only relevant question, though, is: Did OP do the work because she was trying to make money? Would she have done the work even if there was no expectation of getting paid? (or taking a loss?)
I suspect I know the answer to those questions.
There is absolutely nothing in the code that conflates frequency of work done with determining if something is a hobby. You can't just say, "Oh, this was a one off job, so I'll call it hobby income for simplicity's sake."

[jflo]

I love the simplicity of calling it a hobby (and have nothing to deduct anyway), but I agree that no one would consider legal work (discovery in an insurance case) sport or recreation.  There are circumstances where I'd do it for free, but this wasn't one of them.

[MDM]

I love the simplicity of calling it a hobby (and have nothing to deduct anyway), but I agree that no one would consider legal work (discovery in an insurance case) sport or recreation.  There are circumstances where I'd do it for free, but this wasn't one of them.

If you are a lawyer and this was legal work, then yes (see http://www.irs.gov/pub/irs-pdf/p334.pdf) you are stuck with paying self-employment tax: "The earnings of a person who is working as an independent contractor are subject to self-employment tax."  But you don't pay Medicare/SS as well as self-employment taxes because "Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners."

If you are not a lawyer, and this was something (whether you expected to be paid or not) that you don't do on a regular basis, then you are on very firm ground paying only the income tax that you will owe by reporting it under "other income."  There is a reason line 21 of form 1040 exists....

[jflo]

Thanks for that explanation - it's what I'd gleaned from the IRS pubs in plain English, so reassuring to see. Unfortunately (for many reasons), I am a lawyer. :)

[Cpa Cat]

I just want to clarify something: Hobby income is taxable. You are required to report it and be taxed on it.

The above quoted paragraphs reference hobby losses - and when that can be used as a deduction.

The IRS still cares about any money you receive, even if it was fun to earn it, earned by accident, found in a piano you bought at a garage sale, or won in the lottery.

[DoNorth]

TT makes it easy...just make sure you have the deluxe version that has the business option.  My wife is a free lancer and she get's a handful of 1099's every year.  If you're a sole proprietor, it should all be pass through income and yes, you will have to pay self employment tax.  You can take a standard office deduction now if you have one and don't want to to the crazy calculations.

[davef]

Right,
They should be providing you with a 1099-E
You will have to fill out a schedule C and do it as business income.
You can deduct and expenses that you incurred, the remainder will be taxable income.