I do several retired professors whose previous
college/employer now pays $1440 a year towards Medicare.
1099 MIsc. I complained to the college and they won't do
anything. So - it goes on page 1, misc income and I DO NOT
apply SE tax. The LA area IRS seems to know what it's doing
with this and leaves it alone.

Point is - some payers don't know what they are doing and we
simply need to be prepared to argue.

Nan, EA in LA

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I think you are right--the problem is getting a refund of SE
tax after the tax return has been filed. If you try to
amend and get a refund, it's a big chance that the IRS will
send you an SS-8 and request an employment status
determination. (Pain in the neck). (This is what has
happened to me.) (However, I suppose it wouldn't hurt to
try, given your citations.)

NOW, going forward I think you either make this money not
subject to SE?FICA at all OR report it on Form 4137 and
self-assess FICA only.

In either event, you would repor the number on Sched C and
then "back it off" using other expenses with a comment "See
Line 7 Form 1040"

Myt two cents,

Charles Markham,EA

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Prospective clients asked me to review their income tax
situation for 2003 and their income tax return from 2002.
In reviewing the 2002 return, I came across an interesting
situation.

Situation:
The wife works as an RN for a hospital in a "rural" setting.
She finished her schooling in approximately 1993. Over a
year ago, she applied for and received a grant under the
Nursing Education Loan Repayment Program through the U.S.
Department of Health and Human Services. This grant was to
pay for 60% of her student loans from her nursing schooling.

Her original student loan balance was around $50,000
(rounded numbers), so the grant award was for approximatley
$30,000 (60% of $50,000). The $30,000 is to be paid out to
her over a 24 month period, which begain late in 2002 and
will conclude in 2004. The award letter/contract states
that this income will be reported to the IRS and is subject
to income tax. She is also required to work for a qualified
health care facility that is located in a rural area for 2
years, which she should have little trouble complying with.

Dept of HHS issued a 1099-MISC to her for the year 2002.
The payments she received in 2002 were entered in box
7--Nonemployee compensation. Therefore, when the tax
preparer completed the return, they entered it on a Schedule
C and she paid SE tax on this money in 2002 (approximatley
$500).

I have reviewed Pub. 520 Scholarships and Fellowships. It
makes mention of reporting on a Schedule C: "amounts you
receive under a grant that represent pay for your services
as an independent contractor are included in determining net
earnings from self-employment." My problem with this is
that I don't believe she performed any services as an
independent contractor. She received pay and a W-2 from the
hospital where she is employed.

I then reviewed the instructions for the 1099-MISC form and
it states specifically "Scholarships. Do not use Form
1099-MISC to report scholarship or fellowship grants.
Scholarship or fellowship grants that are taxable to the
recipient because they are paid for teaching, research, or
other services as a condition for receiving the grant are
considered wages and must be reported on Form W-2."

My ultimate questions in this situation are these:

1. What services did she perform (or is continuing to
perform) as an independent contractor to make this income
subject to SE tax? Dept of HHS is not subsidizing her
pay from the hospital from what I can see and she is not
performing any services for Dept of HHS as an independent
contractor from my viewpoint.

2. If this is truly not subject to SE tax, how can this get
corrected? I doubt I can talk to anyone at Dept of HHS
that will be able to answer any questions I have nor will
they be able to correct the situation very easily. In
2003, she stands to get nailed with about $2,500 of SE
tax. Client doesn't have an issue paying the income tax
that is due on this money, but they are questioning the
SE tax as am I.

This apparently is a program set up by the Clinton
Administration due to the fact that his mother was a nurse.
If the recipients have to pay income tax and SE tax on the
60% awarded to them, the grant should have been for 100% of
the loan balance. Then, by the time the receipient got done
paying the SE tax and income tax, they still would have had
about 60% left to apply to their student loan balance! As
it is right now, instead of having 60% to apply to the
student loan balance, the recipients will only have about
30-35% of the award to apply to the student loan balance.
That is my 2 cents worth!

I am a frequent reader of this newsgroup and an occasional
poster. I appreciate the wealth of knowledge that is
present here and all of the time devoted to this newsgroup
by frequent posters/respondents and the moderator. Thank you
Dick and everyone else!

Thanks
Cathy H.
Holyrood, KS

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