Retiree Trailing commissions: self-employed income?

[RagnarD]

My father is retired, but still receives income reported on 1099-MISC forms from commissions on insurance products he sold when he was working.   He retired in 2009, and asks TurboTax if he did this work in '09-'10. When clicking "yes", TurboTax says he's self-employed.

I can get around this by saying it's "other income."  A TurboTax window says "Various sources of other income share many of the same characteristics including" ... "little to no time allocated to the activity."  This is clearly the case. He spends no (zero) time on the activity.  The commissions come in so long as past clients pay their insurance premiums.

An IRS web page on self-employment ("Self-Employed Individuals Tax Center") says:
<<<
Generally, you are self-employed if any of the following apply to you.

    * You carry on a trade or business as a sole proprietor or an independent contractor.
    * You are a member of a partnership that carries on a trade or business.
    * You are otherwise in business for yourself (including a part-time business)
>>>

I don't think any of these apply.

However, last year a professional accountant has prepared my father's taxes. He included a Schedule SE for self-employment.  Looking back, I don't agree with this, and think my father could have justly received a refund.

Comments much appreciated.

[TomYoung]

Maybe I'm duplicating what you thought you posted here (the LC treats some characters as HTML markers so that's probably the case here) but the IRS says this regarding retired insurance salesmen:

"FORMER INSURANCE SALESPERSONS - When a former insurance salesperson receives termination payments these payments are not self-employment income if all of the following conditions are met: (1) the amount of payments is not based upon length of service or overall earnings from service performed for the company, (2) you received the payments after your agreement to perform the services with the company ended, (3) you did not perform any services for the company after your service agreement ended and before the end of the year you received the payment, (4) you entered into a covenant not to compete against the company for at least 1-year beginning on the date your service agreement ended, and (5) the amount of the payments depended primarily on policies sold by you or credited to your account during the last year of your service agreement."

It's pretty specific about what's NOT self-employment income and requires certain conditions that I'd think aren't common (e.g., covenant not to compete).  Since you didn't mention any of these conditions I have no opinion here.  Grist for the mill, so to speak.

Tom Young

[RagnarD]

Hi Tom.  Thanks for the comment.   I didn't realize that my quote from the IRS page did not show up. The missing text was not what you included.  It was the definition of self-employed:

    - You carry on a trade or business as a sole proprietor or an independent contractor.
    - You are a member of a partnership that carries on a trade or business.
    - You are otherwise in business for yourself (including a part-time business)

However, earlier today I did find IRS Publication 334, which contains what you quoted on former insurance salespersons.  The more relevant part for me was this: (quotes offset by square brackets)

[
Insurance agent, retired.   Income paid by an insurance company to a retired self-employed insurance agent based on a percentage of commissions received before retirement is reported on Schedule C or C-EZ. Also, renewal commissions and deferred commissions for sales made before retirement are generally reported on Schedule C or C-EZ.

However, renewal commissions paid to the survivor of an insurance agent are not reported on Schedule C or C-EZ.
]

At first I thought this answered my question: That it was self-employment (SE) income. But then I realized that it does not.  Schedule C is "Profit or Loss From Business." I think that reporting the income on Schedule C is separable from self-employment.  That is, if I say that my father's income is not self-employment (SE), the income will be reported on Schedule C, but the SE tax form won't come into play.

So I guess I still don't know for sure. But my best judgment is that my father's case is not self-employment, given the SE definition above.

[RagnarD]

A post-script to my previous post:  A 2001 IRS document ("Who Must Pay Self-Employment Tax?", publication 533) at UncleFed.com says:

[Retired Insurance Agent

Income paid by an insurance company to a retired self-employed insurance agent based on a percentage of commissions received before retirement is subject to SE tax. Also, renewal commissions and deferred commissions for sales made before retirement are generally subject to SE tax.

However, renewal commissions paid to the survivor of an insurance agent are not subject to SE tax.
]

But I have not found this on the current IRS rules.

[RagnarD]

OK, I found what I think is my final answer. It's on the IRS website. My father's case *is* self-employment income. This used to be on IRS publication 533, but now it's here:

<a href="http://www.irs.gov/instructions/i1040sse/ar02.html" rel="nofollow" target="_blank">www.irs.gov/instructions/i1040sse/ar02.html</a>

["Other Income and Losses Included in Net Earnings From Self-Employment"

6.    Amounts received by current or former self-employed insurance agents and salespersons that are:
       - Paid after retirement but figured as a percentage of commissions received from the paying company before retirement,
       - Renewal commissions, or
       - Deferred commissions paid after retirement for sales made before retirement.
        
However, certain termination payments received by former insurance salespersons are not included in net earnings from self-employment (as explained in item 10 under Income and Losses Not Included in Net Earnings From Self-Employment).

]

[TomYoung]

My very first instinct was that the trailing commissions WERE self-employment income and subject to SE tax.  It's really pretty simple.  The commission earned, trailing or not, were earned by your father as a for-profit effort on his part, by the "sweat of his brow" so to speak, and fit right into the definition of self-employment income.

The Code and Reg's only provide that very narrow exception to this concept.

Tom Young