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Patient Therapeutic Wages not Subject to Self Employment Tax

Prior to 1997, a large number of State institutions issued W-2 forms to patients in State facilities who were performing services that were ?deemed? to be of a therapeutic nature.  Beginning in 1997, these payments were reported to the patients at year-end on a Form 1099-MISC.  This change was consistent with the treatment of these wages accorded patients in federal facilities.  Since these wages were exempt from FICA under both Code Section 3121 and the State?s 218 Agreement with the SSA, social security and Medicare was never withheld from these wages.

The question has been raised about whether the amounts reported on Form 1099-MISC are now subject to self-employment tax.  Also, which block of the Form 1099-MISC should the payment amounts be reported in.  After researching this issue, it appears that these therapeutic wage amounts are not subject to self employment tax and block 3 of Form 1099-MISC should be used to report therapeutic wage amounts.  For 1997 payments that were reported in block 7 of Form 1099-MISC, IRS procedures do not require that corrected 1099s be issued.   For 1998 reporting, these payments should be reported in block 3, Form 1099-MISC.