Ask The Taxgirl: Prize Money

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.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
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Kelly Phillips Erb

Kelly Phillips Erb, known as Taxgirl, is a tax attorney, writer, and speaker who explains tax news, IRS updates, scams, financial crime, and money in plain English.

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