Grant & Fellowship Income

Today TaxMama® hears from Mark in the TaxQuips Forum, who is bewildered. Let me summarize. “Mark received a post-doctoral fellowship that covered his salary to do research. It came with insurance and other employee benefits. The income was reported to him on a 1099-MISC. He paid taxes on the income. Two years later, the IRS is asking him to pay self-employment taxes on that income. Why? And how can he resolve this?” 

Ask TaxMama

 Dear Mark,  

I am so sorry that you’re going through this. And I will give you a couple of suggestions about how to handle this. But first, the commercial…or admonition.  

If you are smart enough to qualify for grants and to do research, you’re also smart enough and responsible enough to read the paperwork that comes with it. I am willing to bet that if you pull out the docs, it spells out your financial responsibilities.

Also, when you get a 1099-MISC with an amount in the Self-Employment box, the IRS computers will be looking for (amazing concept) the Schedule SE in the return, showing that you’re paying the self-employment taxes. 

Now, how could you have gotten around this – or at least, reduced your taxes? And you can do these things now – and send the appropriate documents to the IRS to reduce the taxes.  

1) You should have reported the income on Schedule C – where, yes, you could have deducted all relevant costs related to the research – supplies, materials, books, possibly even your computer (if the project was for at least three years). Probably not mileage, since you’re working in the same place all the time.  

2) You can use Form 8919 to claim that you were an employee and not responsible for the SE taxes. (READ THE INSTRUCTIONS TO FORM 8919 CAREFULLY.) You will also have to fill in a Form SS-8 to explain WHY you were not an employee. This form has a series of detailed questions it asks about the nature of your work, and the relationship to your employer.  

However, it is quite likely that the IRS will ask for a copy of your grant contract. And if that grant spells out that you are on your own, (2) may not be a viable option. But it doesn’t hurt to try.  

Consider getting an experienced tax pro to help you. Perhaps you can get some of the penalties waived. Though, I think, at this point, the only penalties are for late payment. That will not be waived.

And remember, you can find answers to all kinds of questions about grants, and other tax and business issues, free. Where? Where else? At www.TaxMama.com.

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