Jeff-Ohio wrote:Seems strange that someone collecting on a covenant not to compete has to pay SE tax on the payment
That would be very strange indeed,
given that it’s not subject to SE tax.
I disagree. Case law says that whether amounts received for a covenant not to compete are net earnings from self-employment depends upon whether the taxpayer is holding himself or herself out to others. Take a look at the following cases:
Barrett, 58 T.C. 284 (1972) (not SE income, taxpayer did not offer services to anyone else)
Barnett, 69 T.C. 609 (1978) (SE income, contract did not prohibit working for anyone else)
Steffens, 707 F.2d 478 (11th Cir. 1983) (reversing TC, not SE income, taxpayer did not offer services to anyone else)
Hornaday, 81 T.C. 830 (1983) (SE income, contract did not prohibit working for anyone else)