Do You Have to Claim Focus Group Incentives as Income?
Whether you operate a market research firm that organizes focus groups on behalf of other companies or a business that wants feedback on a new product or service you're about to roll out, you may need to treat incentive compensation as income to participants. The people who make up the focus group aren't your employees, but they are contractors. As a result, you may have some tax reporting obligations to contend with.
As a general rule, every dollar a person earns is taxable and must be reported on a return unless a specific law exempts it from taxation. Since the law doesn't provide a tax exemption for the compensation -- whether gift cards or other property -- you offer focus group participants, you may have to claim, or treat, these incentives as income when assessing your firm's tax information return reporting requirements.
Focus group participants are designated as contractors because they provide services with the expectation of receiving compensation, or incentives, in return. As a result, participants who earn $600 or more during the year will require a Form 1099-MISC that reports the annual incentives as nonemployee compensation. Focus group participants need the 1099-MISC to prepare their tax returns, which is why the Internal Revenue Service requires that you furnish copies to participants by Jan. 31 – only 31 days after the tax year closes. A second copy must be filed with the IRS by the last day of February or by March 31 if you file electronically rather than on paper. When a participant requires a 1099-MISC, you'll need some information from him, such as a Social Security number, name and address, which you can obtain by requesting a W-9 form.
The nice thing about having to report focus group incentives as income is that your business can deduct all incentive costs as an ordinary and necessary business expense on the next tax return you file for the company. Moreover, this full write-off is available regardless of whether your firm merely administers focus group studies for other companies or your business organizes the focus group for its own products and services.
If the main purpose of a focus group is to eliminate uncertainties relating to the development of a new product or to discover potential improvements to it, the incentive compensation may qualify as a research cost that's chargeable to a capital account, like the overall expense of a patent, for example. Research costs are also deductible as ordinary business expenses, but they're amortizable as well. With amortization, you deduct annual incentive costs ratably over a period of at least 60 months, though the first write-off cannot occur until the first month your company receives an economic benefit from the research -- meaning the first month when products are sold. As an alternative to amortization, the IRS offers an “optional write-off method” that allows you to deduct 10 percent of your annual incentive payments each year for 10 years. Under the optional method, you start taking deductions on your next return regardless of when the company receives an economic benefit, if any.