Etsy, 1099K, child's business

[jcnicnic]

I am totally lost on how to deal with the 1099K from Etsy. As a minor, my child had to list me as the "owner" of her Etsy shop (which I understand). Last year she sold almost $2K in items that she makes. We (she) received a 1099K for this, but it is listed under my name and SSN.

So I have seen suggestions to report this as a hobby, or as self-employment, or even as a business. She does all of the work, she pays for material from her sales etc. We just are the "listed" owner of the shop due to her age.

Of course at my tax bracket I'm getting slammed on the taxes, but I don't know if my child could file their own taxes when the 1099-K is linked to my name/SSN.

Thanks for any help with this!

[JohnB5677]

I understand the situation, but this is your business, and you will have to pay any associated taxes as far as the IRS is concerned.  You can list the business as a hobby.  Hobbies are not subject to self-employment tax.  However, you can not take any deduction for the cost of materials or other expenses.

Please see Tips for taxpayers who make money from a hobby

If someone has a business, they operate the business to make a profit. In contrast, people engage in a hobby for sport or recreation, not to make a profit. Taxpayers should consider nine factors when determining whether their activity is a business or a hobby. They should base their determination on all the facts and circumstances of their activity.

If a taxpayer receives income for an activity that they don’t carry out to make a profit, the expenses they pay for the activity are miscellaneous itemized deductions and can no longer be deducted. The taxpayer must still report the income they receive on Schedule 1, Form 1040, line 21

[jcnicnic]

Thank you so much for the clarification. I wasn't trying to "avoid" reporting it, just wanted to put it in the right place.

[wife-mom-math]

A follow up question on this:

I'm in a similar situation: we own an Etsy shop, but it's actually my 15 yo's business, she's the one who created the products and answered customers' questions. However since she's a minor, all the legal/finance info is under my name. 

Is there anyway for parents to generate W-2 so that the child has an earned income so she can open a custodial ROTH IRA?

Thank you.

[AmeliesUncle]

If it is your child's business, they report the business on their own tax return.

Their net earnings from the business (usually the business profit minus the 1/2 SE tax deduction) is "compensation" that qualifies for an IRA contribution.

If you have a Partnership (you said "we" own an Etsy shop) that you are also an owner of the business, then the business needs to file a separate tax return on Form 1065.  Your child's share of the business profit follows the same rules as I mentioned in the previous paragraph.

[Opus 17]

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@wife-mom-math wrote:

A follow up question on this:

I'm in a similar situation: we own an Etsy shop, but it's actually my 15 yo's business, she's the one who created the products and answered customers' questions. However since she's a minor, all the legal/finance info is under my name. 

Is there anyway for parents to generate W-2 so that the child has an earned income so she can open a custodial ROTH IRA?

Thank you.

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If only your child runs the business, then only your child reports the business, even if the 1099K is issued in your name for other reasons.

Your child will file a schedule C to report their gross income and expenses, and pay income tax and self-employment tax on the net profit.   Her gross income is all her income from business, even if some of it is not listed on the 1099-K.  Her expenses are "ordinary and necessary" expenses for the type of business she is engaged in, and can include purchasing supplies and inventory, shipping costs, credit card processing fees, and other costs.  She pays 15% self-employment tax on the net profit, and the net profit is also added to any other taxable income to determine if she also owes income tax.    (If her total taxable income is less than $13,850, she might not owe income tax, but will still pay self-employment tax.)

Then, about 92% of her self-employment income will count as "compensation" that will support a Roth IRA contribution into an account in your daughter's name.  There is no need to have a W-2 (and no legal way to issue one in this case).

You will list the 1099K on your return if it came in your name, but then you make an adjustment to zero it out so it is not taxable to you.  

If this is a partnership, where both partners have invested in or materially participate in the business, then the partnership needs to file a form 1065 partnership return (due March 15, not April 15!).  As part of the partnership return, each partner will receive a K-1 statement listing their share of income and expenses, that they put on their personal tax return.  Here again, the K-1 figures determine net profit from business activity, and about 92% of your daughter's net profit from self-employment will count as compensation to allow a Roth IRA contribution.