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Blogging Beyond the Numbers

Worker Co-op Owners: Where to Report 1099-PATR Income on Your Form 1040
Posted by: Bruce Mayer 2 weeks ago

In the past there was no clear guidance on where to report the income from a 1099-PATR for a worker co-op owner.  In the 2018 Form 1040 instructions the Internal Revenue Service (IRS) has made it clear where they want the income reported.  On page 14 of the Form 1040 instructions they indicate that the income should be reported on Schedule C or C-EZ.  Generally you will qualify for Schedule C-EZ since you will not have any expenses, but check the form instructions. The Schedule C-EZ is the form for reporting business income and it attaches to the Form 1040.

A major concern, addressed further below is that income on Schedule C-EZ is almost always subject to Self-Employment (SE) tax.  This is the Social Security and Medicare tax imposed on profits from self-employment at the rate of 15.2%.

An initial consideration is that if the 1099-PATR is $400 or less there is an exemption from SE tax.  This will apply if you do not have any other self-employment income.

The contention of many worker co-op owners as well as attorneys and accountants working with worker co-ops has been that the 1099-PATR should not be subject to the SE tax.  For a detailed discussion of this tax issue please see this article by attorney Gregory Wilson.

The key issue is that if the 1099-PATR income is payment for services it is subject to SE tax but if it is a payment of business profits it is not subject to SE tax. If your W-2 wage is fair compensation for your services then an argument can be made that the 1099-PATR is a payment of profits.  There are many possible factors involved in this determination of fair compensation.

In the past I have recommended that 1099-PATR income be reported as Other Income on the Form 1040.  This makes it clearer that this income should not be subject to SE tax.  With the reporting on Schedule C-EZ it seems more likely that worker co-op owners will be getting notices from the IRS asserting that this income should be subject to SE tax.  Some attorneys have been trying to get the IRS to agree that all worker co-op 1099-PATR income should not to be subject to SE tax but the IRS has declined to accept this interpretation.  A legislative solution seems like the only way to resolve this but there is no way to know if it will be successful.  The conclusion is that for now there continues to be risk of a challenge from the IRS if you classify your 1099-PATR as not subject to SE tax.

If you want to take the position that your 1099-PATR income is not subject to SE tax you will need to specify that your Schedule C-EZ income is not subject to self-employment tax with your tax preparer or in your tax preparation software.  If you take this position my suggestion when you complete the Schedule C is to call the business “1099-PATR Profits from Worker Co-op” and specify that the business code is 999999 as “unable to classify”.  That is because this 1099-PATR is not self-employment from the business of your worker co-op but your profits as an owner.   Use the Employer Identification Number (EIN) for your Worker Co-op reported on the 1099-PATR.

If you want to take the position that your 1099-PATR income is subject to SE tax you can complete the Schedule C-EZ and also complete the Schedule SE to calculate the SE tax.

Under the new tax law the next step is that the Schedule C-EZ income is eligible for the 20% pass through business deduction under the new tax law, IRS Code Section 199A.  See the instructions for Line 9 of the Form 1040 on pages 34, 36 and 37.  Here is another article on our blog explaining a bit more about this new tax law. This 20% deduction is a valuable tax break but if the 1099-PATR income is subject to the SE tax the net result will be more tax for most work co-op members.

With the new tax law and new forms there will certainly be revisions to how to approach this area so watch for information on this blog and elsewhere for new developments.

 

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About the Author

Bruce Mayer

Bruce Mayer, MBA, CPA currently serves as a Partner in the Assurance Department, working primarily on audits and tax returns of cooperatives, nonprofits, employee benefit plans and commercial businesses.  Bruce performs audits of all kinds and provides consulting services on taxation of nonprofits and cooperatives.  Bruce enjoys helping clients solve problems and providing clients advice on accounting and tax strategies that meet their needs.


 

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