My son has 18k in internship stipends. He got form 1099 NEC. How to report to avoid self employment tax

[taxquestions18]

My son has 18k in internship stipends with Form 1099 NEC. If I enter it as 1099 NEC it will be subject to self employment tax. I also tried to enter it as "other reportable income", then it is treated as unearned income and taxed on my rate (much higher). Can I report the amount on "other income not already reported on a Form W-2 or Form 1099"? I think that is the way for scholarships/fellowships. Not sure if it also applies to student internship stipends.

[AmyC]

Since it came on a 1099-NEC, let's enter it there without the self-employment tax. Follow these steps:

1. Edit your form
2. Continue to any uncommon situations?
3. Select this was not money earned as an employee or self employed

[taxquestions18]

Thanks! I tried as you suggested, and the income showed up on Line 8 of 1040. However the standard deduction is only $1250. Why is that?

[taxquestions18]

Also to add: When I say it is not SE income, it treated the income as unearned, and the tax rate is very high. Is there a way to claim it as earned income?

[AmyC]

No, any of those educational items, fellowship, scholarship, stipend, are all money that was not earned from work so they do not qualify as earned income. Take a look at Worksheet 1-1 to see if any of it may be nontaxable. See Pub 970.

[Hal_Al]

@taxquestions18 Are you using TurboTax  online or download software? The entry method, for stipend income,  can be different for each type. 

[taxquestions18]

I am using the software version

[taxquestions18]

From the IRS website: Topic no. 421, Scholarships, fellowship grants, and other grants | Internal Revenue Service (irs.gov...

Generally, you report any portion of a scholarship, a fellowship grant, or other grant that you must include in gross income as follows:

• If filing Form 1040 or Form 1040-SR, include the taxable portion in the total amount reported on Line 1a of your tax return. If the taxable amount wasn't reported on Form W-2, enter it on Line 8 

IRS asks to enter scholarships/fellowships/grants on Line 1a (wages), that is earned income. I would think the stipends are treated the same way. Even grant is considered earned income. Based on this logic, stipends should be earned income too. Am I interpreting it correctly?

[Hal_Al]

In TurboTax (TT), enter at:
- Federal Taxes tab (Personal in  Home & Business)

 - Wages & Income

• “I’ll choose what I work on” Button

Scroll down to:

-Less Common Income

      -Click "Visit All". You'll eventually reach a screen to enter the scholarship (stipend) amount. Note: you MUST use the "visit all" button to get the scholarship screen

It will go on line 8r of Schedule 1 (new place starting in 2022) and be treated as earned income for calculation of the standard deduction. 

That said, you should consider the facts in determining whether  this income a "stipend" rather than contract wages or self employment.

[DaveF1006]

Here is a little better path to enter this in Turbo Tax.

1. Log into your account
2. Select Wages and income
3. Less Common income
4. Miscellaneous Income, 1099-A, 1099>start
5. Scroll to the bottom of the page to Other Reportable Income
6. Other taxable income, answer yes
7. Then give a brief description of the income and the amount listed..
8. Once this appears in a summary screen, click on the Add Miscellaneous Income Item and then call it 1099 NEC For Stipend income and the amount of the income. 
9. Now it will be reported in Section 8Z of Schedule 1

[taxquestions18]

The stipends are for research internship, not for providing services. So it is not self employment. I called the person who issue the form. She said it is the new requirement that if a person is not an employee they just issue 1099 NEC. 

TurboTax won't let me enter taxable amount for scholarships/fellowships when I go through the Less Common Income. It already calculated it from my entries under education. In addition 8r is for scholarship/fellowships, so I guest I shouldn't put the stipend under the education section. Can I do it under "other income not already reported on a Form W-2 or 1099"?  This will report on Schedule 1 line 8z, and on 1040 form line 1h. 

[taxquestions18]

When I enter it under the "Other Reportable Income" the amount shows up as line 8z in Schedule 1, but is tax with Kiddie tax. I am trying to avoid both self employment and Kiddie tax if possible. 

[Hal_Al]

For tax purposes,  stipends are scholarships and should be entered as such. You should enter it in the Educational Expenses and Scholarship section, not in any of the income sections. One exception, with download software you have the "Less Common Income -Click Visit All" option described above.

None of the other income sections will accomplish what you want. 

[Hal_Al]

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $13,850 filing requirement and the dependent standard deduction calculation (earned income + $400).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions.

Because of the standard deduction, the first $13,850 doesn't get taxed, but the amount over $15,100 ($13,850 +1250)  is subject to the kiddie tax.

The only ways of not treating the entire amount as unearned income is to report it as self employment income or report the employer, to the IRS, for not using a W-2 (and that's iffy). For the latter, you still have to pay the employee half of FICA, when you file.

[taxquestions18]

The problem I have is that TurboTax only apply $1250 deductible to the amount I entered under Other Taxable income, not the $13850+
If I put it under scholarship in the education section with the other 1098T information, will there be an issue since it is not real scholarship or grants? I haven’t tried this approach yet. 
Will IRS question the return if I don’t enter it as Form 1099 NEC for the stipends?