How to determine whether 1099-MISC income is from self-employment?

Question

I have income that was reported on Form 1099-MISC, Box 7 (nonemployee compensation). I understand that if it is self-employment income, it should be reported on Schedules C and SE, and I would owe self-employment tax. However, I am not sure whether or not it should be considered self-employment income in my case.

In general, on what basis should I make this determination, and what criteria should I consider?

There is a note on the instructions for Form 1040 line 21:

Also, do not report on line 21 any nonemployee com­pensation shown on Form 1099­-MISC (unless it isn't self­-employment income, such as income from a hobby or a sporadic activity). Instead, see the in­structions on Form 1099­-MISC to find out where to report that income.

I think the income in my case might be from "sporadic activity", but I couldn't find any further information about how that term should be construed. There is no useful information in the Form 1099-MISC instructions.

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In my specific case, the income was payment for participating in an academic research study. I am a university professor and the study was investigating the effectiveness of certain teaching methods that I used. I am not generally in the business of participating in such studies, so it seems to be that this might be "sporadic activity". However, the fact that it's closely related to my full-time work might complicate things; and I do not really know whether my interpretation would agree with the IRS's. I am not asking for tax advice on my specific situation, but I would particularly appreciate knowing about general principles that are likely to be relevant to me.

Answer 1

These kinds of questions can be rather tricky. I've struggled with this sort of thing in the past when I had income from a hobby, and I wanted to ensure that it was indeed "hobby income" and I didn't need to call it "self-employment". Here are a few resources from the IRS:

• A general "Who is Self Employed" page, which links to what may count as "Business Activities".
• How do you distinguish between a business and a hobby?
• Is Your Hobby a For-Profit Endeavor?
• "Activity not for profit" in Publication 17 (Your Federal Income Tax)
• Information on "Not-for-Profit Activities" in Publication 535 (Business Expenses).
• Guide to IRS Auditors on how to determine if activities are engaged in for profit such that the expenses can be deducted (PDF)

There's a lot of overlap among these resources, of course. Here's the relevant portion of Publication 535, which I think is reasonable guidance on how the IRS looks at things:

In determining whether you are carrying on an activity for profit, several factors are taken into account. No one factor alone is decisive. Among the factors to consider are whether:

• You carry on the activity in a businesslike manner,
• The time and effort you put into the activity indicate you intend to make it profitable,
• You depend on the income for your livelihood,
• Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
• You change your methods of operation in an attempt to improve profitability,
• You (or your advisors) have 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,
• The activity makes a profit in some years, and
• You can expect to make a future profit from the appreciation of the assets used in the activity.

Most of the guidance looks to be centered around what one would need to do to convince the IRS that an activity actually is a business, because then one can deduct the "business expenses", even if that brings the total "business income" negative (and I'm guessing that's a fraud problem the IRS needs to deal with more often). There's not nearly as much about how to convince the IRS that an activity isn't a business and thus can be thrown into "Other Income" instead of needing to pay self-employment tax.

Presumably the same principles should apply going either way, though. If after reading through the information they provide, you decide in good faith that your activity is really just "Other income" and not "a business you're in on the side", I would find it likely that the IRS would agree with you if they ever questioned you on it and you provided your reasoning, assuming your reasoning is reasonable. (Though it's always possible that reasonable people could end up disagreeing on some things even given the same set of facts.) Just keep good records about what you did and why, and don't get too panicked about it once you've done your due diligence. Just file based on all the information you know.