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Contest Winnings, Self-Employment Income, and Illinois Medicaid

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Hello. This post is a bit long, but please read the whole thing.


I live in Illinois, and I receive Illinois Medicaid. Specifically, I receive the ACA (Affordable Care Act) Adults program for low-income people.

When I originally applied for the program a year ago, I was asked to list all sorts of income (work income, bank interest, unemployment insurance, pension). I was NOT asked to list any contest winnings, and I did not list any.

Right now, the people in charge of Illinois Medicaid are re-evaluating me to make sure that I am still a low-income person. I have to describe the income that I have had in the past 30 days.


Well, I'm in a bit of a dilemma.

Earlier this year, I entered a contest sponsored by a major company. The participants were asked to come up with names for the company's new product. In mid-February, one of my entries was picked as a finalist. That entitled me to a $1200 prize. The company would study the finalist names, but the rights to the names would remain with the contestants who submitted the names. If the company decided to use any finalist name as the name of the product, the company would give an additional $5000 to the contestant who submitted the name, in exchange for the rights to that name.

I was told in mid-February that I would get my $1200 in June 2019. Well, June came and went, and I got nothing. So, I badgered the company about the money. Finally, at the beginning of August, the company paid me the $1200 via PayPal.

PayPal took a $50 fee from my $1200. When I asked why, PayPal said that, when the company paid the money, the company said that it was paying me for "services rendered".

Services rendered? What's going on here? I thought that I was receiving contest winnings, but, apparently, the company was treating me as some kind of independent contractor.

I asked the company about this. The company told me that the contest I had won was not an ordinary contest. In reality, the company was paying me for coming up with a name that the company could study.


So, how would the $1200 be treated at tax time? Well, my research found the following web page:

https://money.howstuffworks.com/personal-finance/personal-income-taxes/what-is-royalty-income-and-how-is-it-taxed.htm


This web page has the following paragraph:

Often, artists receive advance royalties before a work is completed. For example, a record company might pay a songwriter advance royalties of $10,000 for the rights to 10 songs, plus a percentage of proceeds of the songs' sales. But if the songs end up not
making any money, the songwriter still gets to keep the $10,000. So even though that money is called advance "royalties," the taxman actually sees that $10,000 as money for services rendered, reported on IRS Form 1099-Misc, Non-Employee Compensation


So, it appears that my $1200 is similar to the $10000 in the above example. That would mean that I have to report the $1200 on my Schedule C, and that I can deduct the $50 fee on my Schedule C.


But how will Illinois Medicaid treat the $1200? Medicaid does not care about contest winnings, but Medicaid does care about self-employment income.


I did some more research, and I found the following web page:


This web page says that, if a person receives a gift card that he could not reasonably anticipate receiving (for example, by winning a gift card in a sweepstakes), then that gift card can not be used as income for food-stamp determination.


Are the income criteria for food stamps and ACA Adults the same? If yes, then we have the following questions: Is the $1200 that I won, money that I could not anticipate receiving? Can the $1200 be omitted from income consideration for ACA Adults?


Thank you for any information.
 


LdiJ

Senior Member
Hello. This post is a bit long, but please read the whole thing.


I live in Illinois, and I receive Illinois Medicaid. Specifically, I receive the ACA (Affordable Care Act) Adults program for low-income people.

When I originally applied for the program a year ago, I was asked to list all sorts of income (work income, bank interest, unemployment insurance, pension). I was NOT asked to list any contest winnings, and I did not list any.

Right now, the people in charge of Illinois Medicaid are re-evaluating me to make sure that I am still a low-income person. I have to describe the income that I have had in the past 30 days.


Well, I'm in a bit of a dilemma.

Earlier this year, I entered a contest sponsored by a major company. The participants were asked to come up with names for the company's new product. In mid-February, one of my entries was picked as a finalist. That entitled me to a $1200 prize. The company would study the finalist names, but the rights to the names would remain with the contestants who submitted the names. If the company decided to use any finalist name as the name of the product, the company would give an additional $5000 to the contestant who submitted the name, in exchange for the rights to that name.

I was told in mid-February that I would get my $1200 in June 2019. Well, June came and went, and I got nothing. So, I badgered the company about the money. Finally, at the beginning of August, the company paid me the $1200 via PayPal.

PayPal took a $50 fee from my $1200. When I asked why, PayPal said that, when the company paid the money, the company said that it was paying me for "services rendered".

Services rendered? What's going on here? I thought that I was receiving contest winnings, but, apparently, the company was treating me as some kind of independent contractor.

I asked the company about this. The company told me that the contest I had won was not an ordinary contest. In reality, the company was paying me for coming up with a name that the company could study.


So, how would the $1200 be treated at tax time? Well, my research found the following web page:

https://money.howstuffworks.com/personal-finance/personal-income-taxes/what-is-royalty-income-and-how-is-it-taxed.htm


This web page has the following paragraph:

Often, artists receive advance royalties before a work is completed. For example, a record company might pay a songwriter advance royalties of $10,000 for the rights to 10 songs, plus a percentage of proceeds of the songs' sales. But if the songs end up not
making any money, the songwriter still gets to keep the $10,000. So even though that money is called advance "royalties," the taxman actually sees that $10,000 as money for services rendered, reported on IRS Form 1099-Misc, Non-Employee Compensation


So, it appears that my $1200 is similar to the $10000 in the above example. That would mean that I have to report the $1200 on my Schedule C, and that I can deduct the $50 fee on my Schedule C.


But how will Illinois Medicaid treat the $1200? Medicaid does not care about contest winnings, but Medicaid does care about self-employment income.


I did some more research, and I found the following web page:


This web page says that, if a person receives a gift card that he could not reasonably anticipate receiving (for example, by winning a gift card in a sweepstakes), then that gift card can not be used as income for food-stamp determination.


Are the income criteria for food stamps and ACA Adults the same? If yes, then we have the following questions: Is the $1200 that I won, money that I could not anticipate receiving? Can the $1200 be omitted from income consideration for ACA Adults?


Thank you for any information.
Here is how it works for the ACA. You are going to get a 1095A in January that will show how much subsidy (Advanced Tax Credit) you received for health insurance. That will go on your tax return. The amount that you pay for health insurance (in this case I am assuming zero) was calculated based on your estimated income for the year. If you estimated low and your income ends up being higher, you might owe some of that subsidy back as additional tax. If you estimated high, and were actually paying part of the premium, you could end up with an additional tax refund.

$1200, is not going to have a big impact one way or the other...and it's only the amount after expenses that matters.
 
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Taxing Matters

Overtaxed Member
Frankly, for tax purposes what you describe is contest winnings, not self-employment income. It's taxable income, but would not be subject to self-employment tax (Social Security and Medicare taxes). For the ACA tax subsidy its the total income that you have that matters, regardless of the source of the income. For Medicaid, it matters whether you were engaged in substantial gainful activity (SGA). Coming up with a few names for a contest and having one picked as a finalist does not strike me as SGA.
 

LdiJ

Senior Member
Frankly, for tax purposes what you describe is contest winnings, not self-employment income. It's taxable income, but would not be subject to self-employment tax (Social Security and Medicare taxes). For the ACA tax subsidy its the total income that you have that matters, regardless of the source of the income. For Medicaid, it matters whether you were engaged in substantial gainful activity (SGA). Coming up with a few names for a contest and having one picked as a finalist does not strike me as SGA.
I would likely agree that it really should be "other income" rather than Schedule C, but it appears that the company reported it to paypal in such a way that indicates that they consider it to be for "services rendered" which is apparently why paypal deducted 50.00 from it. I am not particularly familiar with paypal but that was a pretty big fee. So, really we don't know what the company is going to put on the 1099.

If its reported as non-employee compensation, then if he does not report it on Schedule C he is going to end up with a CP-2000 letter from the IRS. My experience is that its difficult to get the IRS to back down when they believe that something should have been reported on Schedule C. Yes, I know quite well that you could probably get the IRS to back down but nobody can afford to pay your rates over about $150.00 in self employment tax.
 

Taxing Matters

Overtaxed Member
If its reported as non-employee compensation, then if he does not report it on Schedule C he is going to end up with a CP-2000 letter from the IRS. My experience is that its difficult to get the IRS to back down when they believe that something should have been reported on Schedule C. Yes, I know quite well that you could probably get the IRS to back down but nobody can afford to pay your rates over about $150.00 in self employment tax.
Yes, I could if the facts were described as the OP stated. And I think the OP could likely do it too. If it clearly looks like a contest, any reasonable examiner is going to see that and not sustain the CP-2000. IMO this isn't some close call scenario where I would expect a real tussle over the issue.
 
I would likely agree that it really should be "other income" rather than Schedule C, but it appears that the company reported it to paypal in such a way that indicates that they consider it to be for "services rendered" which is apparently why paypal deducted 50.00 from it. I am not particularly familiar with paypal but that was a pretty big fee. So, really we don't know what the company is going to put on the 1099.

If its reported as non-employee compensation, then if he does not report it on Schedule C he is going to end up with a CP-2000 letter from the IRS. My experience is that its difficult to get the IRS to back down when they believe that something should have been reported on Schedule C. Yes, I know quite well that you could probably get the IRS to back down but nobody can afford to pay your rates over about $150.00 in self employment tax.

The company in question is based in the UK. The company told me that only US-based companies are required to send 1099 forms to the IRS, and that the company therefore did NOT send to the IRS a 1099 form.
 

LdiJ

Senior Member
Yes, I could if the facts were described as the OP stated. And I think the OP could likely do it too. If it clearly looks like a contest, any reasonable examiner is going to see that and not sustain the CP-2000. IMO this isn't some close call scenario where I would expect a real tussle over the issue.
I probably have at least half a dozen cases of situations where we put something on line 21 even though the 1099-Misc had the income in box 7, that I am working on right now. We don't charge our clients anything additional to defend a tax return (unless its the clear cut fault of the client that it has to be defended) so our clients are not having to pay anything for this service.

I expect to end up with the Taxpayer's Advocate before I get a couple of them resolved. Its frustrating because the IRS is being very passive/aggressive about it. The rest of them I do expect to get resolved in the long run without having to go to the Advocate, but its still a frustrating process and the clients get more and more anxious with each new letter.
 

LdiJ

Senior Member
The company in question is based in the UK. The company told me that only US-based companies are required to send 1099 forms to the IRS, and that the company therefore did NOT send to the IRS a 1099 form.
Okay well that changes the entire discussion. That would have been good to know from the onset of the discussion.
 

LdiJ

Senior Member
I think that the Advanced Tax Credit only applies to plans purchased in the Marketplace (www.healthcare.gov). Illinois Medicaid is NOT part of the Marketplace.
Okay, then that won't apply to you. However since you admitted that the money is coming from the UK and there won't be anything reported in the US, then even if you report to Medicaid that you got the $1150.00 from a contest, its unlikely to cause you any issues.
 
Okay, then that won't apply to you. However since you admitted that the money is coming from the UK and there won't be anything reported in the US, then even if you report to Medicaid that you got the $1150.00 from a contest, its unlikely to cause you any issues.
It has occurred to me that my situation is similar to that of a person who makes a film, submits that film to a film festival, and wins a cash prize for Best Film while still retaining the rights to that film. That person could legitimately say that the cash prize is a contest prize and that the prize should be listed on Line 21.

I created a name, submitted the name, and won a cash prize for having a Top 10 name while still retaining the rights to that name. I can legitimately say that the money I won is a contest prize and should be listed on Line 21.

As for Medicaid, since Medicaid did not ask me about contest winnings in my original application, it is probable that Medicaid follows the food-stamp criteria and omits contest winnings from income consideration. So, I will not be mentioning the contest winnings to Medicaid.

Thanks to both of you for your comments.
 

commentator

Senior Member
Quote: "So, I will not be mentioning the contest winnings to Medicaid."

You will be making a big old mistake here! When you sign up on an income based program, you give the program the right to investigate any and all of your governmental paperwork including your tax forms. If anything, I do mean anything shows up on your tax forms as a source of income, you will be cross referenced as someone on an income support program, and this will be investigated.

These income based programs do not assume that people will mention everything they should mention, every little source of income, etc. They check, cross check and investigate everything to the max. (Actually the monitoring of these programs sometimes goes far beyond the reasonable, but poor people don't have lobbyists and so many are so bitterly opposed to any form of "welfare" programs anyway.)

What you do is take in all the paperwork you have regarding this particular income/contest winning, whatever it is when you do your re-evaluation for Medicaid. And be perfectly honest with them and particularly honest as far as that you did receive this money, and when you did get it, and that you do not understand exactly whether you'll be qualifying it as contest winnings, 1099 contractor wages, whatever. They have legal staff in the department that will be looking at it as soon as you tell them about it. The point is, YOU DO MENTION IT!!!!

You are not the one who gets to decide whether it's going to be considered includable income by Medicaid or not. You are not expected to make that decision based on your research (even after all your diligent internet research and discussion on legal forums) and decide whether or not to tell them. They will consider this fraud. It is money you received, money you put in your bank account, money you reported on your taxes and used for your support in some way. That's what they're asking about.

They'll find out anyway, later if not sooner, and to have failed to inform them before they find it will be regarded as fraud. If they later decide after their investigation that it was not includable income, you'll still have been nicked for fraud, have had questions raised, and a lot of bad experiences from this situation. Why not be proactive and do what you are supposed to do, and tell them all about this at the get go and let them use their decision making powers to decide whether or not you qualify for Medicaid or how this income is to be treated?

I always used to tell people to assume that with an income based program, your ex friend or ex wife or a jealous neighbor who knows about your situation will be on the fraud hotline in twenty minutes telling them that Joe Blow is receiving Medicaid and this person KNOWS they won a big bunch of money in a contest last fall, etc. etc. Make sure this information, if checked, will be something you and the caseworker are already dealing with.
 
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Quote: "So, I will not be mentioning the contest winnings to Medicaid."

You will be making a big old mistake here! When you sign up on an income based program, you give the program the right to investigate any and all of your governmental paperwork including your tax forms. If anything, I do mean anything shows up on your tax forms as a source of income, you will be cross referenced as someone on an income support program, and this will be investigated.

These income based programs do not assume that people will mention everything they should mention, every little source of income, etc. They check, cross check and investigate everything to the max. (Actually the monitoring of these programs sometimes goes far beyond the reasonable, but poor people don't have lobbyists and so many are so bitterly opposed to any form of "welfare" programs anyway.)

What you do is take in all the paperwork you have regarding this particular income/contest winning, whatever it is when you do your re-evaluation for Medicaid. And be perfectly honest with them and particularly honest as far as that you did receive this money, and when you did get it, and that you do not understand exactly whether you'll be qualifying it as contest winnings, 1099 contractor wages, whatever. They have legal staff in the department that will be looking at it as soon as you tell them about it. The point is, YOU DO MENTION IT!!!!

You are not the one who gets to decide whether it's going to be considered includable income by Medicaid or not. You are not expected to make that decision based on your research (even after all your diligent internet research and discussion on legal forums) and decide whether or not to tell them. They will consider this fraud. It is money you received, money you put in your bank account, money you reported on your taxes and used for your support in some way. That's what they're asking about.

They'll find out anyway, later if not sooner, and to have failed to inform them before they find it will be regarded as fraud. If they later decide after their investigation that it was not includable income, you'll still have been nicked for fraud, have had questions raised, and a lot of bad experiences from this situation. Why not be proactive and do what you are supposed to do, and tell them all about this at the get go and let them use their decision making powers to decide whether or not you qualify for Medicaid or how this income is to be treated?

I always used to tell people to assume that with an income based program, your ex friend or ex wife or a jealous neighbor who knows about your situation will be on the fraud hotline in twenty minutes telling them that Joe Blow is receiving Medicaid and this person KNOWS they won a big bunch of money in a contest last fall, etc. etc. Make sure this information, if checked, will be something you and the caseworker are already dealing with.
When I applied for Medicaid last year, I had contest winnings, but I did not mention the contest winnings because Medicaid did not ask for them. I did list my contest winnings on my tax forms. Yet, Medicaid has never said anything about these winnings.

Why would I be nicked for fraud if the income that I do not mention is not includable?

If I mention this year's winnings to Medicaid, some overzealous worker will kick me off Medicaid, causing me to appeal. Even if the appeal is successful, it will be too much of a hassle.

Years ago, I collected unemployment insurance. At one point, I turned down a job offer. That offer was for a job paying below minimum wage. I appealed, and the appeal was very quickly decided in my favor because the job was below minimum wage. But the appeal caused me a lot of worry and hassle.
 

FlyingRon

Senior Member
Alas, the Illinois medicaid application DID ask for the information. You must misunderstood it. Contest winnings are INCOME and should have been included in the section entitled "Does anyone named on this form RECEIVE money from any source other than employment?"
 

LdiJ

Senior Member
Alas, the Illinois medicaid application DID ask for the information. You must misunderstood it. Contest winnings are INCOME and should have been included in the section entitled "Does anyone named on this form RECEIVE money from any source other than employment?"
Doesn't that statement kind of imply that someone would be receiving money on an ongoing/forward going basis? Its present tense and that implies ongoing. Otherwise wouldn't it say "has anyone named on this form received money from any source other than employment?"
 

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