Is interest earned on a sch C business subject to employment tax? 1099-INT has the business EIN. If not, where is it entered instead of Other Income on Schedule C?

[JohnW15]

Yes, it's subject to self-employment tax since it's income received by the business, and it's entered as Other Income on Schedule C..

[kdianne]

Even if the interest was bank interest?  Just clarifying since I forgot to add that information in my question.

[JohnW15]

Thank you for clarifying, it does make a difference and I should've asked.  Interest income from bank accounts isn't generally considered business income for a sole proprietor.  You should just report this as your personal interest income, on Schedule B.  Sorry if I misled you.

[kdianne]

Thanks for the answer.  Sorry I didn't provide all the info at first.

[buickmansfdt]

He stated that the 1099-INT used the business EIN as the recipient's TIN.  Does it get reported on the schedule C?

[AnnetteB6]

If the interest being reported is bank account interest, then it would be reported on Schedule B regardless of whether the Form 1099-INT was issued in the business EIN or the sole proprietor's social security number.  There is no appropriate place on Schedule C to report bank account interest.  

The most important thing is that it will be reported on the tax return.  Keep some notes with your tax records and a copy of the Form 1099-INT in case the IRS questions where the income was reported.  

@buickmansfdt 

[pb051]

I'm not sure answer here is correct. There does seem to be a location on schedule C to enter regular bank interest. Section does not seem to differentiate from sole proprietor or other businesses.  From IRS Publication 334, Section 7:

"Additions to Gross Profit

If your business has income from a source other than its regular business operations, enter the income on line 6 of Schedule C and add it to gross profit. The result is gross business income. Some examples include income from an interest-bearing checking account, income from scrap sales, income from certain fuel tax credits and refunds, and amounts recovered from bad debts. "

[imnotrod]

I do have a thought... report the interest income on Sch C - Line 6 as you should, as that is  how it is being reported to the IRS on the 1099-INT and probably where they will be looking for it, VS a "note to self" to explain you put it on Sch B - if (when) it is questioned.  Now, hear me out, assuming the Sch C is profit, and you are subject to 15.3% SE tax ... well Sch C Line 23 is "Taxes Expense"  So, 1099-INT amount  X 15.3% Tax Expense deduction would windup you're paying income tax on the interest, but not SE Tax, and would be a better argument to IRS if questioned.  I know, maybe I shouldn't be thinking out loud here.  Please, be gentle.  That is what I do, and have never been called out on it by the IRS.  

[DavidD66]

Unless the interest was earned as part of business operations (e.g. you're financing your sales, or charging interest on accounts receivable, or making loans)  Interest income reported on Form 1099-INT with the tax ID of a Schedule C business should not be reported on Schedule C.  It should be reported on Schedule B.  Enter the 1099-INT as interest income as if it has your social security number on it.  It's a similar concept as Interest income received by an S-corp - it isn't included in the calculation of "Oridnary business income (loss) " that is reported on line of the shareholders K-1.  It is excluded from that calculation and reported on line 4 - Interest income.  That interest income flows to schedule B of 1040.  Since your filing on Schedule C, your business is a disregarded entity for tax purposes.  Your interest income goes on Schedule B.  

[dianachiang]

Hi,

I want to agree with your response that it should not be reported on Schedule C (so that it is not counted for SE tax purpose), but how does your response reconcile with the following excerpt from Publication 334 (2024) Tax Guide for Small Business, where it states:

Additions to Gross Profit

If your business has income from a source other than its regular business operations, enter the income on line 6 of Schedule C and add it to gross profit. The result is gross business income. Some examples include income from an interest-bearing checking account, income from scrap sales, income from certain fuel tax credits and refunds, and amounts recovered from bad debts.

Thanks!

 

[Mike9241]

IRS publications and form instructions are not official documents that taxpayers can rely on if they follow them and they are wrong.  A couple did rely on a publication that had an error. The IRS caught them. Hit them with taxes penalties and interest. They went to court citing reliance on the publication. The court said too bad that pub is not official. 

pub 334 also says this

Interest and Dividend Income
Interest and dividends may be considered business income. Interest received on notes receivable that you
have accepted in the ordinary course of business is business income. Interest received on loans is business

income if you are in the business of lending money.

thus if an entity not in the business of lending money were to make a loan and collect interest, that interest would not be business interest. 

so is interest on a business checking account business interest or not? in my opinion, if the entity is not in the business of earning interest income (like a financial institution does) it's non-business.