Tax rules?

[aaronc879]

I participate in phase 1 clinical research studies for a living. The senior tax preparer at the local H&R Block says I have to pay taxes as a self employed contract worker because I plan to make a profit and plan to continue doing the studies as my primary source of income. I make around $25K/yr and pay around 20% in taxes for self employment tax, Federal and State income tax. That's a lot for a low income person but I do it since it's the law. After talking with some other study participants it seems more than half of them have never filed taxes despite making in some cases over $500K from doing studies. They don't pay taxes despite making as much as $50K/yr. They get free healthcare, free phones, subsidized housing, food stamps and more. Of the people who do file taxes most of them file the income as "other income" rather than self employed income so they don't pay the expensive FICA. Am I a sucker or are they breaking the law. Why would the IRS not notice when people are making $500K+ and never paying taxes. One of those people showed up in a brand new Corvette.

 

[pb4uski]

From what you wrote, I think that I agree with the H&R guy. Do you receive a W-2 or 1099 for this income?

Not sure what "participate" means as you have used the term above. Can you elaborate?

 

[aaronc879]

From what you wrote, I think that I agree with the H&R guy. Do you receive a W-2 or 1099 for this income?

Not sure what "participate" means as you have used the term above. Can you elaborate?

I will receive 1099s for each company I do a study at. I go online and look at the 20+ clinics around the country that have studies and decide which one is best for me. Then I contact the clinic and go for a screening appointment. I read over the informed consent/contract and if it looks good then I sign it and continue. I give a urine sample and blood sample, get my height and weight recorded and have an ECG and physical. A couple weeks later I get a call saying whether I passed and if i'm invited to join the study. If I get in the study then I go thru the tests again to make sure i'm still healthy then I dose with the study drug. Then I go thru a lot of blood draws, vitals, ECGs, etc for anywhere from a couple days to several weeks while living in the clinic. I provide a service and get paid anywhere from $250-500/day.

 

[OldShooter]

... Of the people who do file taxes most of them file the income as "other income" rather than self employed income so they don't pay the expensive FICA. Am I a sucker [?] ...

This is the wrong place to ask, IMO. Why don't you ask one of these "other income" people for the name of their tax advisor or just consult a CPA. H&R Block is not what I would consider to be a reliable consultant on anything beyond the very ordinary.

DW serves on a couple of large foundation grant committees and receives a couple of $K a year in honoraria/aka compensation. AFIK this is not self-employment and, interestingly, H&R Block Tax Cut software does not think so either. So we don't pay self employment tax on it.

 

[aaronc879]

This is the wrong place to ask, IMO. Why don't you ask one of these "other income" people for the name of their tax advisor or just consult a CPA. H&R Block is not what I would consider to be a reliable consultant on anything beyond the very ordinary.

DW serves on a couple of large foundation grant committees and receives a couple of $K a year in honoraria/aka compensation. AFIK this is not self-employment and, interestingly, H&R Block Tax Cut software does not think so either. So we don't pay self employment tax on it.

My tax person said if it is your primary source of income and you plan to continue doing it then it's self employed income. If it's just a one time thing or a small portion of your overall income then it's "other income".

 

[braumeister]

Apparently this can be a complicated issue.

I found this online, and it looks to be a pretty good summary:
https://forteresearch.com/news/payments-to-research-subjects-what-is-taxable-income/

There is also this, which also seems helpful:
https://ttlc.intuit.com/community/retirement/discussion/income-question-does-income-from-a-medical-study-have-to-be-reported-if-so-how/00/418923#

 

[aaronc879]

Apparently this can be a complicated issue.

I found this online, and it looks to be a pretty good summary:
https://forteresearch.com/news/payments-to-research-subjects-what-is-taxable-income/

There is also this, which also seems helpful:
https://ttlc.intuit.com/community/retirement/discussion/income-question-does-income-from-a-medical-study-have-to-be-reported-if-so-how/00/418923#

Yeah, I have seen those sites. Doesn't seem to clarify my situation much. I was hoping maybe someone here was an Accountant or worked for the IRS and could give a definite answer as to what is legal or not. Seems like a grey area. I have contributed thousands to IRAs based on this income. Now i'm concerned that it may not be considered earned income and I could get in trouble. Maybe I should just do like the others and not pay an taxes. I also log my miles and other expenses and deduct that from my income.

 

[Sunset]

Yeah, I have seen those sites. Doesn't seem to clarify my situation much. I was hoping maybe someone here was an Accountant or worked for the IRS and could give a definite answer as to what is legal or not. Seems like a grey area. I have contributed thousands to IRAs based on this income. Now i'm concerned that it may not be considered earned income and I could get in trouble. Maybe I should just do like the others and not pay an taxes. I also log my miles and other expenses and deduct that from my income.

I was going to say if you consider this self-employment, then you should/could open a individual-solo-401k , which would allow you to contribute to a self IRA/ROTH in addition to the regular IRA/ROTH anyone can get.

In effect more deduction/savings is available to you, probably more than you earn in total.

I don't see how the IRS would object, as you are basically paying more tax than if they were successful in their objection.

 

[aaronc879]

I was going to say if you consider this self-employment, then you should/could open a individual-solo-401k , which would allow you to contribute to a self IRA/ROTH in addition to the regular IRA/ROTH anyone can get.

In effect more deduction/savings is available to you, probably more than you earn in total.

I don't see how the IRS would object, as you are basically paying more tax than if they were successful in their objection.

In the past I haven't made enough money to justify opening a solo 401K. I just contribute to a regular IRA to get my MAGI down to around $15-17K to get a good ACA subsidy. I may want to start doing more studies next year and then I would open a solo 401K so I can save over $6000/yr. I don't want to do a SEP IRA with the 25% limit.

 

[RunningBum]

I don't know the answer to your question, but I do know that if you are supposed to pay and don't, others doing the same will not help your case any.

 

[braumeister]

FWIW, when I was doing independent consulting I had a solo 401(k) with Fidelity. They made it very easy.

 

[pb4uski]

Yeah, I have seen those sites. Doesn't seem to clarify my situation much. I was hoping maybe someone here was an Accountant or worked for the IRS and could give a definite answer as to what is legal or not. Seems like a grey area. I have contributed thousands to IRAs based on this income. Now i'm concerned that it may not be considered earned income and I could get in trouble. Maybe I should just do like the others and not pay an taxes. I also log my miles and other expenses and deduct that from my income.

I think this link is insightful even though it looks at the issue of providing guidance to the 1099 issuer on how to report such income rather than the taxpayer.. but it recognizes that there a two modus operandi for participants... where participating in these is a trade/business (in which case SE taxes apply) or more casual participation (where SE taxes would not apply).

https://www.irs.gov/pub//lanoa/pmta01353_7356.pdf

Note that in either case, it is income... that part isn't gray at all... what is gray and situational is whether the income is subject to SE taxes or not.

From what you have described aaron, it sounds to me like your situation is more of a trade or business rather than casual other income, consistent with what your tax preparer is advising you.

A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. The regularity of activities and transactions and the production of income are important elements. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need, however, to make ongoing efforts to further the interests of your business.

Is the income reported on the 1099-MISC in box 3 or box 7?

I'm surprised that your fellow paticipants who allegedly do not report the income haven't been caught as the 1099-MISC issued by the payer notifies the IRS that the participant received income and checking to make sure that the participant reports said income is pretty automated.

The good part of paying SE taxes is that the earnings will count toward SS retiremnt benefit eligibility... it will not for your colleagues who don't report what they receive as income or report it as other income.

 

[aaronc879]

I think this link is insightful even though it looks at the issue of providing guidance to the 1099 issuer on how to report such income rather than the taxpayer.. but it recognizes that there a two modus operandi for participants... where participating in these is a trade/business (in which case SE taxes apply) or more casual participation (where SE taxes would not apply).

https://www.irs.gov/pub//lanoa/pmta01353_7356.pdf

Note that in either case, it is income... that part isn't gray at all... what is gray and situational is whether the income is subject to SE taxes or not.

From what you have described aaron, it sounds to me like your situation is more of a trade or business rather than casual other income, consistent with what your tax preparer is advising you.

Is the income reported on the 1099-MISC in box 3 or box 7?

I'm surprised that your fellow paticipants who allegedly do not report the income haven't been caught as the 1099-MISC issued by the payer notifies the IRS that the participant received income and checking to make sure that the participant reports said income is pretty automated.

The good part of paying SE taxes is that the earnings will count toward SS retiremnt benefit eligibility... it will not for your colleagues who don't report what they receive as income or report it as other income.

Thank you, this is helpful. This answers a couple questions. I thought that if they don't pay self employment tax then their income doesn't count towards SS. You seem to be saying that that IS in fact the case which makes me feel better about paying so much on my low income. At least it's counting towards SS whereas the other people will not get any SS if they are not paying that tax.

The last year I filed taxes with this income(2016) the 1099s had my income in box 3(other income). I hope that doesn't mean I can't claim it as Self Employed. The clinic probably doesn't expect that we would do this as our primary source of income.

I am also surprised that they haven't been caught by the IRS. However it is not just a couple people it is possibly a majority of the hundreds(or even thousands) of people who do this for a living.

 

[aaronc879]

If I am understanding things correctly if I file self employment I can deduct business expenses and if I file the income as "other income" then I can't deduct expenses.
If I claim "other income" and don't pay any FICA does it then count as a zero for SS income when figuring in my 35 highest years?

 

[gauss]

If I am understanding things correctly if I file self employment I can deduct business expenses and if I file the income as "other income" then I can't deduct expenses.
If I claim "other income" and don't pay any FICA does it then count as a zero for SS income when figuring in my 35 highest years?

That is my understanding.

Your SS annual record should show your contributions for all your working years so you should be able to verify this.

-gauss

 

[aaronc879]

That is my understanding.

Your SS annual record should show your contributions for all your working years so you should be able to verify this.

-gauss

Yes, it does show SS earnings for me. I'm wondering if it would still show SS earnings if I didn't pay the Self Employment tax(FICA).

 

[gauss]

Yes, it does show SS earnings for me. I'm wondering if it would still show SS earnings if I didn't pay the Self Employment tax(FICA).

My understanding is that what shows up on your SS record would only be the sum of the employer-employee contributions to FICA. For self-employment, you pay both sides of this.

Based on the law, as I understand it, you would not get credit if no SE taxes are paid.

Here is a reference on self-employment from Social Security.

Note the IRS form Schedule SE reference in the above link is where the self-employment taxes are calculated and paid.


-gauss
'a guy on the Internet'

 

[SecondCor521]

If I am understanding things correctly if I file self employment I can deduct business expenses and if I file the income as "other income" then I can't deduct expenses.
If I claim "other income" and don't pay any FICA does it then count as a zero for SS income when figuring in my 35 highest years?

Correct on both points.

If you file as self employment, then:

1. The income counts as earned income and you qualify to contribute to an IRA or solo 401(k) or whatever.
2. You can deduct business expenses, including mileage, unreimbursed travel expenses, phone, home office, etc. As long as it is ordinary and necessary for the production of your income it generally it can be deducted.
3. You'll generally have to pay SE taxes on your net profit (gross income minus expenses). [1]
4. Your net profit will be considered earnings for SS purposes.

If you file as other income, then:

1. You can't contribute to an IRA or solo 401(k) or whatever.
2. You can't deduct expenses.
3. You won't owe SE taxes.
4. You don't get any credit for the income from Social Security.

There is a document out there that outlines the various factors in determining whether something is self employment or hobby income. Yours sounds squarely in the self employment category to me. If it's something you're trying to make money at and working to maximize, then that's self-employment. If it's something you enjoy and you happen to make some money from it, then it's other income. A good example of the latter is maybe you do something artsy and crafty, like making holiday wreaths, or picture framing, or knife sharpening. If you then have friends ask you to do that for them and they pay you, then that's hobby income. Hobby income is usually sporadic and the main goal is not to make money.

If I can find the link to the official IRS document I'll follow up.

[1] If you're filing your own taxes, be sure to include the adjustment to income on Schedule 1 for 1/2 of the SE taxes. That is proper and will reduce your tax liability. If you're using a tax program or a CPA they should do this automatically for you.

 

[SecondCor521]

If I can find the link to the official IRS document I'll follow up.

Found this which looks on point and authoritative:

https://www.irs.gov/newsroom/hobby-or-business-irs-offers-tips-to-decide

That link claims you can deduct hobby expenses up to hobby income which is something I hadn't read before. Maybe @cathy63 will chime in.

 

[aaronc879]

Correct on both points.

If you file as self employment, then:

1. The income counts as earned income and you qualify to contribute to an IRA or solo 401(k) or whatever.
2. You can deduct business expenses, including mileage, unreimbursed travel expenses, phone, home office, etc. As long as it is ordinary and necessary for the production of your income it generally it can be deducted.
3. You'll generally have to pay SE taxes on your net profit (gross income minus expenses). [1]
4. Your net profit will be considered earnings for SS purposes.

If you file as other income, then:

1. You can't contribute to an IRA or solo 401(k) or whatever.
2. You can't deduct expenses.
3. You won't owe SE taxes.
4. You don't get any credit for the income from Social Security.

There is a document out there that outlines the various factors in determining whether something is self employment or hobby income. Yours sounds squarely in the self employment category to me. If it's something you're trying to make money at and working to maximize, then that's self-employment. If it's something you enjoy and you happen to make some money from it, then it's other income. A good example of the latter is maybe you do something artsy and crafty, like making holiday wreaths, or picture framing, or knife sharpening. If you then have friends ask you to do that for them and they pay you, then that's hobby income. Hobby income is usually sporadic and the main goal is not to make money.

If I can find the link to the official IRS document I'll follow up.

[1] If you're filing your own taxes, be sure to include the adjustment to income on Schedule 1 for 1/2 of the SE taxes. That is proper and will reduce your tax liability. If you're using a tax program or a CPA they should do this automatically for you.

Thank you that is very helpful. I guess even though it seems a bit expensive for a low income person I will keep paying the SE tax on this income.

 

[RE2Boys]

Don't forget to take the self-employment health insurance adjustment to income if you otherwise qualify!

See :https://www.irs.gov/publications/p535#en_US_2019_publink1000208843

and
https://turbotax.intuit.com/tax-tip...nce-premiums-if-youre-self-employed/L6bRhLaVE

 

[aaronc879]

Don't forget to take the self-employment health insurance adjustment to income if you otherwise qualify!

See :https://www.irs.gov/publications/p535#en_US_2019_publink1000208843

and
https://turbotax.intuit.com/tax-tip...nce-premiums-if-youre-self-employed/L6bRhLaVE

This has little impact on me since I save enough in tax deferred savings to get my MAGI down to around $15-17K/yr and therefore get very low cost HI. This year I am paying $28.94/mo. If the ACA subsidies are taken away in a couple years then this info would be helpful for me so thank you.

 

[donheff]

I'm just amazed people can make a living at this. Is participation limited so people can't do multiple trials at the same time? Have you ever had a serious side effect and, if so, do the immediately stop your participation?

 

[aaronc879]

I'm just amazed people can make a living at this. Is participation limited so people can't do multiple trials at the same time? Have you ever had a serious side effect and, if so, do the immediately stop your participation?

I have done studies as my sole source of income in 2012-16, 2020. I have done well over 30 studies and have never had a serious side effect. Yes, you have to do only one at a time. Some clinics participate in a shared database that tells them if you are already in a study at another clinic. Otherwise it's on the honor system. Many study subjects have very little honor though. There are people who "double dip" which increases the risk of side effects. Those are the people who make $50K+/yr. I have never topped $30K/yr but my expenses are low so that's fine. I like because I get a lot of time off and still make a living wage(by my standards). My current study is 4 periods where in each one I check in at 7am on Monday and get out at 10am Thursday. That's 75 hours and I get $1500. Then there is an out patient visit a week after the last period. If I complete the whole study I get a $2000 bonus. So I get $8000 for 17 days of work spread out over a 4 month period. Lots of time off for decent money. There are some big studies like one posted recently for 56 straight days in house for $16,800. I don't like those studies because most of the people who do studies are rude and excessively loud. I can't stand being in a clinic more than a week at a time. Definitely not for everyone but if the alternative is minimum wage or unemployment then it's a good option IMO. Every medication that you or a loved one has ever needed to take had to first be tested by people like me. It's an important service that someone has to do.

 

[Koolau]

I have done studies as my sole source of income in 2012-16, 2020. I have done well over 30 studies and have never had a serious side effect. Yes, you have to do only one at a time. Some clinics participate in a shared database that tells them if you are already in a study at another clinic. Otherwise it's on the honor system. Many study subjects have very little honor though. There are people who "double dip" which increases the risk of side effects. Those are the people who make $50K+/yr. I have never topped $30K/yr but my expenses are low so that's fine. I like because I get a lot of time off and still make a living wage(by my standards). My current study is 4 periods where in each one I check in at 7am on Monday and get out at 10am Thursday. That's 75 hours and I get $1500. Then there is an out patient visit a week after the last period. If I complete the whole study I get a $2000 bonus. So I get $8000 for 17 days of work spread out over a 4 month period. Lots of time off for decent money. There are some big studies like one posted recently for 56 straight days in house for $16,800. I don't like those studies because most of the people who do studies are rude and excessively loud. I can't stand being in a clinic more than a week at a time. Definitely not for everyone but if the alternative is minimum wage or unemployment then it's a good option IMO. Every medication that you or a loved one has ever needed to take had to first be tested by people like me. It's an important service that someone has to do.

I certainly appreciate that you do it. I understand you can make your living at it. So I guess it's all good. But personally, I'd rather go find a j*b. I understand that YMMV.