Taxpayer asks:
Hello taxgirl,
I am helping a friend prepare a 2007 tax return. He received a 1099 with income in box 3 other income for a prize he won. Will he have to pay SE tax on this income?
Thanks
Taxgirl says:
If the prize is unrelated to your friend’s employment or business and is reported on line 21 as “other income” then it is not subject to self-employment tax.
However, if the prize is related to employment or business (it’s really a bonus, or “top sales person” type award) and would otherwise be reported on a Schedule C, then it would be subject to self-employment tax. This is especially true if expenses related to the prize were taken as a deduction on a Schedule C as business expenses (for example, if I entered taxgirl.com in the “Best Tax Blog Ever Written” blog contest). This is not to say that there might not be a good argument for separating the prize from income even if connected to employment or business (it would be very fact specific) but as a rule, the more closely the prize is linked to employment or business, the more likely it is to be subject to self-employment tax.
Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.
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