Self-Employment Tax Charges from 2020

[avery_g]

In 2020, I raised funds for a fellowship abroad. The organization I was going to go abroad with did not collect the funds directly, so I used another organization to collect the funds for me (giving people a tax write-off since it is a 501-c3). That org then payed me using the funds I had raised from supporters. I received a 1099-NEC and did report on my taxes the amount I had received ($21,000). I paid about $2,856 in tax when I filed. This week (2/28/22) I received a letter from the IRS saying I should have put $2,967 under line 4 for Self-Employment Tax and I had put 0. I don't know where the $2,967 came from. 

The IRS says I now owe $2,787 plus $74 in interest. I used Turbo Tax to file my 2020 taxes and was honest when answering all questions. I'm confused why I received this from the IRS and if there's anything I can do to contest it. Any help would be appreciated!

I have to respond to the IRS by 3/30/22. Thanks!!

[ThomasM125 · Accepted solution]

The money you received should not be subject to self-employment tax, as that is for money earned the is related to business activities. The default treatment by the IRS is to treat income reported on a form 1099-NEC as business income, however.

The questions in TurboTax are designed to prevent the income from appearing as business income on your tax return in cases like yours. Since I don't know how you answered them, I can't comment on what answers you gave that may have triggered the income as appearing to be business income. You can look on your form 1040, on schedule 1 to see if the income is reported on line 8. If so, the IRS should not have treated it as business income.

To remedy the situation, you should respond to the IRS notice in writing and explain where the income was from and what it was used for and they should abate the tax and related penalties.

[avery_g]

Thank you so much for your response! I really appreciate it! 

You're saying that $21,000 is not business income because I didn't earn it due to selling a product or service, for example, but I received it as payment for the work I did for the non-profit, correct? 

I checked my 1040 and that $21,000 was reported in line 8 in Schedule 1. 

When I respond to the IRS, I would assume it's best to be as specific as possible? Can you also elaborate on why the money should not be subject to SE tax? I just want to make sure I fully understand when I respond to the IRS. 

Thank you again!! 

[ErnieS0]

You $21,000 is not business income because you were not operating a "business" to make a profit. Mainly you want to show the IRS you doing this NOT to make money.

Be as specific as possible and provide documentation of the 501(c)(3) and how everything worked.

This explanation of hobby income may be helpful (your income and hobby income are both reported on Schedule 1, line 8 and both an nonprofit activities) in explaining that you were not trying to make money.

You would be self-employed if:

• You carried on the activity in a businesslike manner and maintained complete and accurate books and records.
• You had personal motives in carrying on the activity.
• You put time and effort into the activity to make it profitable.
• You depended on income from the activity for your livelihood.
• You or your advisors had 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.

Having some of these would not disqualify you from NOT being self-employed. The whole picture counts.

How do you distinguish between a business and a hobby?