IRS has sent me a letter requesting why my Trustee Commissions listed on line 21 of my 1040 tax return should not be subject to self-employment tax. I am not a professional trustee and have only one trust from which a receive an annual commission. How do I respond to the letter and am I responsible for the tax?
Question to be answered: Do the fees stem from a personal relationship with the decedent that is not based on particular expertise or special qualities?
According to Regs. Sec. 1.1402(c)-1, a taxpayer must carry on a trade or business, either as an individual or as a member of a partnership, in order to have net SE earnings.
According to Rev. Rul. 58-5 Generally, nonprofessional fiduciaries (that is, for example, persons who serve as executor or administrator in isolated instances, and then as personal representative for the estate of a deceased friend or relative) will not be treated as receiving income from a trade or business unless all of the following conditions are met:(a) There is a trade or business among the assets of the estate,(b) The executor actively participates in the operation of this trade or business,(c) The fees of the executor are related to the operation of the trade or business.
However, according to Rev. Rul. 58-5, in some circumstances, even though the estate’s assets do not include a trade or business, if the management activities required of the executor for administering the estate are sufficient in scope and duration, these activities could constitute operation of a trade or business and the income be deemed SE income.All personal representatives must include in their gross income fees paid to them from an estate. If paid to a professional executor or administrator, self-employment tax also applies to such fees. For a nonprofessional executor or administrator (a person serving in such capacity in an isolated instance, such as a friend or relative of the decedent), self-employment tax only applies if a trade or business is included in the estate’s assets, the executor actively participates in the business, and the fees are related to operation of the business.
also see <a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/4118674-received-1099-misc-for-fiduciary-fees-turbotax-home-business-wants-to-set-up-as-new-business-and-charge-self-employment-tax-where-to-enter-so-no-self-emploiyment-tax">https://ttlc.intuit.com/questions/4118674-received-1099-misc-for-fiduciary-fees-turbotax-home-business-wants-to-set-up-as-new-business-and-charge-self-employment-tax-where-to-enter-so-no-self-emploiyment-tax</a>
Thanks all for this clear reply, @maglib - one follow up question for your expertise if you could spare a moment:
If a trustee is not a professional fiduciary, but was a personal representative of the deceased grantor (assume an immediate family member of the deceased grantor) and is acting as the trustee in an ongoing capacity, but there is no business owned or operated by the trust - can the trustee contribute their earnings as trustee into a solo 401k and still avoid paying SE tax?
@stmp wrote:If a trustee is not a professional fiduciary.....can the trustee contribute their earnings as trustee into a solo 401k and still avoid paying SE tax?
No. Those payments to you as trustee, under that fact pattern, would not qualify as earnings from employment or a trade or business.
All personal representatives must include in their gross income fees paid to them from an estate. If paid to a professional executor or administrator, self-employment tax also applies to such fees. For a nonprofessional executor or administrator (a person serving in such capacity in an isolated instance, such as a friend or relative of the decedent), self-employment tax only applies if a trade or business is included in the estate’s assets, the executor actively participates in the business, and the fees are related to operation of the business.
see this example different but at same time can be utilized. https://www.irs.gov/pub/irs-wd/0305001.pdf
Or here is a great article from tax advisor as to why you would have to consider paying SE on them to contribute to a 401k. https://www.thetaxadviser.com/issues/2007/nov/taxtreatmentofcompensationreceivedasanonprofessionalrepresentative.html