Miscellaneous or self-employment income?

Welcome to the world of "trade or business."

If your activity involves a trade or business, it is reported as a business activity, preferably on Schedule C and if necessary, Schedule SE.

If a trade or business, you get to reduce your income by your allowed trade or business expenses all on Schedule C.

If the result is a gain, Sch SE also calculates your FICA and Medicare taxes. Different businesses/SchC's can all flow into one Sch SE.

If not a trade or business, report income on Form 1040 line 21 and expenses as Misc 2% Deductions on Schdule A, not to exceed the income reported.

So all you have to do is decide if it is a trade or business, right?

Here are two marginally helpful links:

If you have a profit motive, engage in this activity more than just once or twice, and end up with a profit, there's a real good chance it is a trade or business.

Sounds to me just from what you wrote that your software work, plus placing your hat on the sidewalk asking for money from anyone happy with your product, is not a short one-time activity and would be a trade or busimess. The more often you do this the more convincing the argument becomes.

Even allowing for an argument that you are paid for your preparation time and not for reading on the Sabbath, the answer comes down to whether this is a one-time or two-time activity or more regular.

Director's fees are Schedule C activities (Pub 525). If all her Schedule C profits are under $434, no SE tax, else SE tax as well.

Same statement for you.

Each of you have at least one Scheddule C and, if necesary, each of you has your own Schedule SE.

I'm surprised you didn't post a link to the "nine factors", which is what I would address were I preparing a return in this situation. In other words, to document my due diligence I would focus on questions and answers related to these factors.

The nine factors are found in Treas. Regs. §1.183-2(b)(1) through (9), also listed in Ch. 1 of Pub 535.

Here is a link to IRS audit techniques around how they might inquire about each of these nine factors. You can get a flavor of the types of facts and circumstances that might apply to your situation by reading the questions.

Time spent on the activity, and the amount of profits, if any, are two of the nine factors in determining profit motive.

I would conclude perhaps the opposite, based on the very limited information we have. Does someone with a profit motive merely put a "hat on the sidewalk asking for money"? No, they advertise or promote their product and do their utmost to collect revenue from customers.

He clearly is not relying on this activity for his livelihood, and probably has no significant financial investment in it. There may well be a strong element of personal pleasure or recreation (the software creative process, and "bragging rights" in the world of software geeks).

There is no formula, but again I would focus on the nine factors.

I'd call this a not-for-profit activity, looking at all nine factors. Reasonable people might disagree.

The pub refers to "corporate directors", is the local non-profit community organization a corporation?

I recall that Harlan Lunsford once proposed here that one easily-achieved piece of tax simplification would be to raise the SE threshold on Sched. C activities from $400 (net) to $1,000, and then maybe index it for inflation. This might increase compliance and give the IRS more accurate data for refining their audit techniques, further helping close the tax gap.

-Mark Bole

This looks like a nice addon. I will try it out. How about an option like send at half past the hour, that way all your mail will be sent in one batch?

Sounds like the former to me (Other Income, line 21) as you don't intend to make a business out of it. The donations are just a little pocket money. Search in the internet for "business versus hobby" to find answers to your general question.

If this were a Schedule C business you probably would have no profit anyway because you'd be deducting electricity for business use of your computer, depreciation on the purchase price of your computer by the percentage of business use, business license, liability insurance, etc all of which are surely more than $200 for the year. Besides, if your Schedule C business makes less than around $400 a year, you pay no SE tax (another very strange rule to me because the time cost of filing out form SE is truly negligible).

As a hobby, you can still deduct expenses but subject to 2% of AGI. So if you make 100k, only expenses above 2k are deductible -- but expenses include all unreimbursed employee expenses, all tax expenses like amounts you pay a tax preparer or a professional to manage your money, etc. And remember, if you're in AMT, then you don't get to deduct the expenses at all because the deduction is not allowed under AMT, and while your regular tax will decrease by say $500 because of the deduction, your AMT tax will increase by the same amount. AMT can hit single people making 150k or more, or married couples making 200k or more, but in theory it can affect someone making 50k, depends on state you live in, etc. I haven't been able to figure it out.

If I wrote that addon and got just $200, I probably wouldn't even bother reporting it.

SE income in my opinion because you do it on a regular basis -- namely once a year. Then again, once a year is not frequent enough, so I could be wrong, and besides there's no formal business involved, no advertising, etc.

SE income.

Hmm.

If by "profit motive" you mean "in it for the money," then I'm not really sure that's accurate.

• I've been writing and distributing free software for over two decades for no compensation at all.

• If the Mozilla Web site didn't allow me to ask for donations, I would have written and distributed this software anyway. I wrote it because I needed it; being able to distribute it to others who also find it useful is just a fringe benefit.

• I don't expect the money I get from the software to ever come anywhere close to adequately compensating me for the time I've spent working on it, which has surely been enough hours that the donations come to far under the minimum wage.

• If I had a "profit motive," I could have taken those hours and devoted them to my day job instead, which would have improved by career (and salary) advancement.

If I quit my day job and worked full-time developing and releasing Mozilla add-ons, then that would be a pretty good sign that I had a profit motive, but as things are now, I don't think that's the case.

Like I said, I only do it once a year, on the anniversary of my bar mitzvah. I would do it even if they didn't pay me. I didn't even know they paid until I got a check in the mail after the first time. There are other, more frequent Torah readers for whom this is an actual source of income, and it takes long enough to prepare for each reading that the synagogue needs to pay to get enough readers, but I'm not in that category. I actually usually send whatever they pay me back to the synagogue as a donation.

So no, I really don't think there's a profit motive here either.

But I suppose in both of these cases, I don't have to convince you -- I have to convince the IRS when they come auditing. :-)

Thanks for the response.

jik

Or, just use the same nine factors that the IRS would use.

I don't know the rationale behind the rule, but I don't think it has anything to do with how costly it is to file the tax form.

It's taxable income.

The amount of time spent on the activity is just one of nine factors.

Wouldn't it depend on all the facts and circumstances?

-Mark Bole

Havn't looked at your link, but dos this work similar to the shell at command?

For $200 total, and even adding the 100 for the baal kriah work, there's no SE tax. Unless you have more han 2% of AGI worth of deductions, there's no practical difference in SE vs Line 21.

Good points. Thanks.

Well, actually, yes. It's called busking, and is a very traditional way to make a living :^)

We just returned from a Hawaiian cruise which included the mandatory stopover in Ensanada, and there were buskers all over. Just walk around Times Square or Michigan Avenue and in cities large and small world wide and you'll see lots of buskers,

Surely no one would argue that a schedule c activity is one you rely on for your livilihood?

Sounds good to me. Church employees have an even lower threshold.

It is a perfect example of an established de minimis amount.

It's possible that the $200 is subject to SE tax. If the original poster has another Schedule C business that generates $50,000 in income, then he is already well above the threshold, and even another $1 in income in another Schedule C will be subject to SE tax. My assumption is that there is on Schedule SE despite the number of Schedule C businesses, which seems right.

Then what could be the reason? I imagine in the old days if someone made $200 in SE income you'd have to open the filing cabinet with their social security earnings record and update it, but the amount is so small that the cost to the IRS is great. Today with computers, it's a whole different story.

Initially I said I wouldn't bother about it because the amount is so small that the IRS probably wouldn't never find out about it, and the cost for you to track these small amounts plus the expenses (which are deductible on Schedule A for hobby subject to limits) is very great.

But then, it's known that prizes such as Nobel and Pulitzer prizes are tax free. From publication 17 and 525:

Pulitzer, Nobel, and similar prizes. If you were awarded a prize in recognition of accomplishments in religious, charitable, scientific, artistic, educational, literary, or civic fields, you generally must include the value of the prize in your income. However, you do not include this prize in your income if you meet all of the following requirements.

1. You were selected without any action on your part to enter the contest or proceeding. 2. You are not required to perform substantial future services as a condition for receiving the prize or award. 3. The prize or award is transferred by the payer directly to a governmental unit or tax-exempt charitable organization as designated by you. The following conditions apply to the transfer. 1. You cannot use the prize or award before it is transferred. 2. You should provide the designation before the prize or award is presented to prevent a disqualifying use. The designation should contain: 1. The purpose of the designation by making a reference to section 74(b)(3) of the Internal Revenue Code, 2. A description of the prize or award, 3. The name and address of the organization to receive the prize or award, 4. Your name, address, and taxpayer identification number, and 5. Your signature and the date signed. 3. In the case of an unexpected presentation, you must return the prize or award before using it (or spending, depositing, investing it, etc., in the case of money) and then prepare the statement as described in (b). 4. After the transfer, you should receive from the payer a written response stating when and to whom the designated amounts were transferred.

These rules do not apply to scholarship or fellowship awards. See Scholarships and fellowships, later.

The $200 received is sort of an award. The addon is a charitable, artistic, and civic accomplishment. The person who wrote the addon did not have to pay to be a member of Thunderbird addon team, and is under no obligation to perform future services. So if he assigned that $200 to a charitable organization, then it would not be income to him.

Now if he normally donates at least $200 a year to charity, then he could donate $200 using the proceeds of addon reward, and $200 less from his own funds.

Some might consider the $200 to not be an award. I consider it to be an award because end users are voting for their addon by making $5 donations. But in case my reasoning is too far fetched, consider: all donations to Thunderbird will be put into a fund, and then the money distributed according to a panel that decides that merit of each addon. The panel could very well be the end users themselves who donated the money. Or maybe they could judge the merit of a product by the number of downloads -- but many times people download a product just to try it out. Or maybe there could be a true panel of judges.

In other words, "It's OK to cheat on your taxes if you don't get caught."

In other words, "It's OK to cheat on your taxes if it's too much trouble to be honest."

I don't find the income to be hard to track at all, given that (a) I actually keep decent financial records throughout the year, and (b) all of the donations I'm receiving for the software come in via Paypal and say explicitly what they were for.

As for deductions, the ratio of time I spend working on the software against all the time I spend working on my computer is so low that it's hardly worth trying to deduct anything. I will report and pay tax on the entire amount, with no deductions, because that is both the ethically right and legally required thing to do.

No, they're not. They're only tax free in limited circumstances which don't apply here (and don't apply to many Nobel and Pulitzer winners).

It is a stretch, at best, to say that the software people are paying me for falls into any of those categories, and a stretch to say that the money people have paid me was "awarded" to me as a "prize in recognition of accomplishments." I think it is clear from the wording that the interpretation you are suggesting is not what was intended by lawmakers.

Note that it says ALL of the following requirements, and not in particular the third requirment listed below:

In other words, a prize like the Nobel or Pulitzer is only tax-free if you turn around and donate it to someone else. It seems to me that the only point of this special case is so that if you do choose to turn around and donate the prize, you don't have to pay taxes on it even if your income is so high that your itemized deductions are limited, or your income is so low that the amount of the prize exceeds the ceiling for charitable deductions, or you don't itemize your deductions.

In short, it's simply wrong to say that prizes like the Nobel and Pulitzer are tax free; they are only tax free when you give them away.

And since I'm not giving away the money that people are paying me for the software I've written, but rather keeping it, this is all irrelevant and the money is clearly taxable income (probably misc. income, not SE income, judging from the discussion here).

No, it's not.

No, it's not.

Who cares? How could this possibly matter? If I "asigned"

You've taken a very simple situation and for some reason attempted to turn it into an extremely complex one. I can see no reason why it is necessary or appropriate to do so.

I'd like to see you try to make that argument in tax court. It would be sort of funny to see how quickly it gets shot down.

It is perfectly clear that neither Congress nor the IRS intends the money people are paying me for my software to be considered an "award," and I don't think the law is ambiguous.