Standard deduction and 1099-NEC

[circle11]

Trying to help my daughter with her first time filing. She is a full time college student and had a couple of small sources of income in 2022. She made just over $7K in total, from two different sources, both sent 1099-NEC. I am just learning that not only standard deduction does not apply to this situation, but she is also taxed at 15% instead of the lowest 10% tax bracket. Is that so, is there any way around this and, if this the case, is this justified by some kind of rationale? Why is a college student who made a few bucks on the side being punished?  

[KrisD15]

Please clarify, 

What type of income is the 1099-NEC reporting and how did you entered it? 

Did she end up with a Schedule C and need to pay Self-Employment tax (FICA)?

[circle11]

Thanks so much for your response!

Entered it under "Self-employment income and expenses", two separate 1099-NECs. Is there another way? She participated in two sporting events and this is basically her prize money.  

Can't see anything about Schedule C when I go to "Preview my 1040" in TurboTax. But from what I understand, yes this is a self employment tax. 

[VolvoGirl]

Don't think prize money should be self employment on Schedule C.  But for Schedule C,

You pay Self Employment tax (Scheduled SE) on a Net Profit of $400 or more on Schedule C.  You pay 15.3% SE tax on 92.35% of your Net Profit (If it is greater than $400).  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  

You are paying 15.3% for……

SS for employer 6.2% 

SS for employee 6.2% 

Medicare for employer 1.45% (on all wages & profit, no max)

Medicare for employee 1.45% (on all wages & profit, no max)

[SharonD007 · Accepted solution]

Prize money should not be reported under Self-Employment Income and Expenses. You will not be able to view the Schedule C under preview my 1040. Follow the steps below to delete the 1099-NECs that you entered under Self-Employment Income and Expenses and then add the Income as prize money.

• Go to the Wages & Income section of the tax return
• Scroll down to Self-employment income and expenses and select Review
• You should be at the screen Your 2022 self-employed work summary
  • Select the trash can by Review to delete the Self-employment information
  • Select Done
• You will be back at the Wages & Income section
• Scroll all the way down to the Less Common Income category (it’s at the bottom)
• Select Start or Revisit beside Miscellaneous Income, 1099-A, 1099-C
• Scroll down and select Start or Revisit beside Other Reportable Income at the bottom of the section
• On the screen Other Taxable Income enter Prize Money as the description and the amount.

Your daughter’s tax return will not be subject to self-employment taxes only income tax. Just remember to check the box that says I can be claimed on someone else’s tax return if she is your dependent.

For additional information on prize money, please review the TurboTax article Everything You Need to Know About Filing Taxes on Winnings.

[circle11]

Thank you for your answer!

Actually, turns out I got too excited too soon. Once I've removed the 1099-NEC and re-entered it in the section you pointed me to (Miscellaneous Income / Other Taxable Income), the tax calculated by TurboTax (the amount she owes) only went up by about $130. Any other suggestions? 

[KrisD15]

Prize money is taxable income. 

The answers above only instructed how to have it not be reported as Self-Employment" income and therefore not being subject to Self-Employment tax, which is Social Security and Medicare Tax (FICA)

She will still need to pay income tax on the prize value. 

When you daughter gets paid for NIL-

Yes, the student will need to claim that NIL income as Self-Employment income.

She will be required to file Schedule C.

She will be charged "Self-Employment" tax (FICA)

She will be allowed to claim any expenses that are ordinary and necessary for her business

She will not be eligible for Qualified Business Income Deduction because her business will be considered Specified Service Trade or Business (SSTB)

SSTB 

[circle11]

Thanks for explaining the NIL situation - got it. 

Re: Self Employment tax vs regular income tax, now I am unclear why she owes less with Self Employment. Should not Miscellaneous Income / Other Taxable Income be taxed at 10%, whereas Self Employment is 15.3%? Entering Miscellaneous Income / Other Taxable Income seems very straight forward, not much there that I could have entered incorrectly. 

[SharonD007]

When a taxpayer is self-employed, the income is subject to both income tax and self-employment taxes. The self-employment taxes are 15.3% (Social Security is 12.4% and Medicare is 2.9%) of your profit (income minus expenses). The income tax rate for the taxpayer is determined by their filing status and income. In your daughter’s case it is 10% if her taxable income is under $10, 275 and she is single. Note, if she has self-employment income, she will pay both income tax and self-employment taxes on it.

When you enter the 1099-NEC as Miscellaneous Income/Other Taxable Income, she will not be subject to Self-Employment taxes, but she still must pay income tax on it.

Review your entries to ensure that income is not counted twice. You can also preview the tax return to check what is there by following the instructions below:

1. Select Tax Tools on the left of your screen
2. Click Tools from the drop-down menu
3. Click on View Tax Summary
4. Click on Preview my 1040 on the left-hand side of screen.

For additional information please refer to the TurboTax article Self-Employed Federal Income Taxes.

[circle11]

I am really sorry, I keep beating my head against the wall trying to enter prize money in a way when they are not taxed. I've deleted absolute everything from her income (both income and tax due is $0). Then I entered her prize money income of $3,400 using the following method:

• Scroll all the way down to the Less Common Income category (it’s at the bottom)
• Select Start or Revisit beside Miscellaneous Income, 1099-A, 1099-C
• Scroll down and select Start or Revisit beside Other Reportable Income at the bottom of the section
• On the screen Other Taxable Income enter Prize Money as the description and the amount.

 In the Other Taxable Income this is very simple, only two fields I get are Description and Amount. I enter $3,400 and immediately her Tax Due changes to -523. Why is that? This negative 523 amount is not 10% and since the income is under $10,275, why is there Tax Due at all.

Thanks again for your help and sorry if I am missing something very simple. 

[SharonD007]

The prize money that your daughter received is taxable unearned income. Since she is claimed as a dependent on your tax return, her standard deduction is $1,150 and you stated that her income is more than $7,000. The standard deduction is subtracted from her income to determine the taxable amount. It is subject to income tax and is going to result in a balance due. 

[circle11]

So one of the winnings is $3,400. When I enter it alone via Other Taxable Income, the tax due is calculated as -$523. Is that correct? 

[LindaS5247]

A child who earns $1,150 or more (tax year 2022) in "unearned income,” such as dividends or interest, needs to file a tax return.  Prize winnings are considered unearned income.

You are entering it correctly.  You should enter both or all Forms 1099-NEC and any other income that she has.  Follow all TurboTax questions and prompts.  Make sure to indicate that she is being claimed as a dependent on your tax return.

Reporting prize money

1. Go to the Income section of the tax return.
2. Scroll down to the Less Common Income category.
3. Click Start or Update beside Miscellaneous Income, 1099-A, 1099-C.
4. Click Start or Update beside Other Reportable Income at the bottom of the section.
5. Enter your description (prize money) and the amount.

Click here for additional information on "At What Income Does a Minor Have to File an Income Tax Return/"