Four of us grandchildren received a signing bonus on mineral rights in Weld County in 2011. I have just received a notice from the IRS that I owe self-employment taxes on that signing bonus money. No well has been drilled at this time. The other three heirs have not received any such notice. I am self-employed in an import business totally foreign to oil, and this bonus came pretty much out of the blue. Does anyone know what the IRS rule is on this? My tax preparer thinks they are wrong, but is not overly experienced in this area. Thank you.
The IRS gets 35% of my bonuses. I rat hole 80% for taxes and posterity and play with 20%.
Linda, the bonus money is not profit from self employment and should be listed on your 1040 on line 17 as rentals, royaltys etc. You have to file a schedule E for supplemental income. On that schedule you can deduct any costs associated with the bonus such as legal or other professional fees.
You really need to find a tax preparer or CPA that is familiar with oil and gas issues but it is my understanding that only the “working” interest is subject to self-employment taxes. If you did not participate in the well as an investment, it is not a “working” interest.
Bonus payments or normal Royalty interests are normal income. If producing, there is also depletion deductions that apply.
Mike answered while I was drafting... lol
Linda,
Mike is right on as usual. Its passive income to you. Now, if the 4 grandchildren had some legal costs they paid in getting title, evaluation costs, appraisal costs etc,, you may be able to deduct your share of the title costs. Your accountant will know.
I have been self-employed for many years and received letters from the IRS almost every year, claiming that I owe more taxes, penalties, and/or interest. One time, they claimed that I owed about $8,000. EVERY SINGLE TIME they were WRONG, and I could prove that they were wrong. The advice here is correct, bonus consideration is not subject to self-employment tax, and don't forget your depletion deduction on Line 17 or 18 of Schedule E for any royalty income.
Thank all of you for your expertise. The oil rights are held in my father's trust, so the bonus was expensed out to me as trustee fees. Could that make a difference? Or should the bonus money be transferred to me in some other way.
Pete Wrench said:
I have been self-employed for many years and received letters from the IRS almost every year, claiming that I owe more taxes, penalties, and/or interest. One time, they claimed that I owed about $8,000. EVERY SINGLE TIME they were WRONG, and I could prove that they were wrong. The advice here is correct, bonus consideration is not subject to self-employment tax, and don't forget your depletion deduction on Line 17 or 18 of Schedule E for any royalty income.
Wow, that's a very interesting question. Normally, bonus consideration is not considered earned income, but if you received it specifically as a fee for work that you did as a Trustee, my guess would be that perhaps that is taxable. Sounds like a CPA question to me. Perhaps it could be categorized as a "trust expense" instead to reduce tax liability? Just wondering.
If the bonus was received as a trustee fee, that would go on line 21 of your 1040 as Other Income, since you are a family member and not a professional Trustee (from a bank or law firm, for example). It would probably be reported as other income on your 1041 Trust tax return and then be deductible under Trustee Fees on your 1041 Trust tax return. It depends on whether it was initially paid to the trust (to you as Trustee) or to you personally. Either way, you do not owe self-employment tax. Any other royalties or royalty expenses would go on Schedule E for the Trust 1041 and then what is distributed by you would go on the 1041 Beneficiary Schedule K-1. I am not an accountant, but was a trustee of a family trust. The IRS will try to tell you that you owe self-employment tax on the amount on line 21, but you do not if you are not a person in the business of being a trustee.
Thank you for your knowledgeable reply. I feel quite confident from what you have all said that my appeal will be successful.
Gay Sauer said:
If the bonus was received as a trustee fee, that would go on line 21 of your 1040 as Other Income, since you are a family member and not a professional Trustee (from a bank or law firm, for example). It would probably be reported as other income on your 1041 Trust tax return and then be deductible under Trustee Fees on your 1041 Trust tax return. It depends on whether it was initially paid to the trust or to you personally. Either way, you do not owe self-employment tax. Any other royalties or royalty expenses would go on Schedule E for the Trust 1041 and then what is distributed by you would go on the 1041 Beneficiary Schedule K-1. I am not an accountant, but was a trustee of a family trust. The IRS will try to tell you that you owe self-employment tax on the amount on line 21, but you do not if you are not a person in the business of being a trustee.
Even though it is in a trust, the leasing oil company can lease to the heirs themselves without the lease going thru the trust. This is what my husbands family goes thru until they have a deed of distribution. They only time they won’t apply is when a well is drilled that is producing; then it will be required to have a deed of distribution.
Yes, in my opinion, if you received a fee for work you did as a trustee, that would be subject to federal income tax but not federal self-employment tax. I did not make that distinction in my last posting.
I think it is extremely interesting that only you among you and your three relatives got this notice from the IRS. They send me letters all the time saying that I owe them money, and they are wrong every single time. My guess is that, especially if you are the only one among the four of you who is self-employed, then you are being harassed simply by virtue of being self-employed, because I never received any of these bogus letters myself until I was self-employed. You are not a good government slave paying them money every two weeks like they want you to, so this is how they get back at you.
Jennifer,
That can vary greatly state to state and the language of the trust may limit it. I've understood in most cases if there is a trustee assigned, only the trustee can enter into a lease. However, I've seen oil and land companies do some things that did not necessarily follow state law. They are willing to defend it by "intent" and fight for it to stand. But they may not be willing to pay on a producing well in the same situation, as you stated.
Jennifer B said:
Even though it is in a trust, the leasing oil company can lease to the heirs themselves without the lease going thru the trust. This is what my husbands family goes thru until they have a deed of distribution. They only time they won't apply is when a well is drilled that is producing; then it will be required to have a deed of distribution.