I have no income aside from unemployment insurance in beg of 2022, parents want to save taxes by paying me $25k out of their business account, I file a 1099, they get tax deduction?

[tk01kj]

I don’t know how exactly this would work. If my parents pay me $25k out of their business, report on a 1099, would I be able to report that $25k as income, and they would be able to take a itemized tax deduction via job expense?

Edit: I would perform a job for the family business writing software. They pay me wages. Not sure how I would report those wages or how they report it

[Bsch4477]

You would be self employed and they would be paying you for your services. That would be a deduction for them assuming that your services performed a real function for their business. You would pay 15.3 percent of that income as self employment tax in addition to any regular income tax owed. Be sure that your activity is a legitimate business relationship and not a scheme to transfer money to you in a way that benefits their tax situation. 

[VolvoGirl]

You would have to file a schedule C in your personal return for self employment income.  

Some general info on self employment on Schedule C.......

You will need to keep good records. You may get a 1099NEC at the end of the year if someone pays you more than $600 but you need to report all your income no matter how small. You might want to use Quicken or QuickBooks to keep track of your income and expenses.

There is also QuickBooks Self Employment bundle you can check out which includes one Turbo Tax Online Self Employed return....
https://quickbooks.intuit.com/self-employed

When you are self employed you are in business for yourself and the person or company that pays you is your customer or client.

To report your self employment income you will fill out schedule C in your personal 1040 tax return and pay SE self employment Tax. You will need to use the Online Self Employed version or any Desktop program but the Desktop Home & Business version will have the most help.

Turbo Tax Beginners Tax Guide for the Self Employed
https://turbotax.intuit.com/tax-tips/self-employment-taxes/beginners-tax-guide-for-the-self-employed...

What is form 1099NEC?
https://turbotax.intuit.com/tax-tips/irs-tax-forms/what-is-form-1099-nec/L5fbwIFSn

Here is some IRS reading material……
IRS information on Self Employment
https://www.irs.gov/businesses/small-businesses-self-employed/self-employed-individuals-tax-center

Publication 334, Tax Guide for Small Business
https://www.irs.gov/pub/irs-pdf/p334.pdf

Publication 535 Business Expenses
https://www.irs.gov/pub/irs-pdf/p535.pdf

[Mike9241]

that $25K has to be reasonable for the work you perform for them. 

I also think that the IRS would treat you as an employee so the business would have to file payroll tax returns and give you a w-2. I think it would be stretching it if you were treated as an independent contractor in order to avoid the payroll tax returns and W-2. 

[Hal_Al]

Q.   Parents want to save taxes by paying me $25k out of their business account, Would they  be able to take a itemized tax deduction via job expense?

A. Yes, if you actually did $25K worth of work. .  It would be a straight (off the top) business deduction, not an itemized deduction.  If they report it as wages, as opposed to issuing you a 1099-NEC, they would also pay (and get to deduct) the employer share of the FICA tax.

As others have said, in addition to income tax, you must pay social security and  medicare tax on that income. It will be either  FICA withholding on your W-2 (if you are paid wages) or you filing Schedule SE, as part of your income tax return,  to pay it as "self employment tax" if you get a 1099-NEC. 

There's some question as to whether the income should be reported as wages (W-2) or self employment. I'm of the opinion either way is OK.

Then there's the issue how does this payment affect your ability to draw unemployment compensation. 

[Carl]

I would perform a job for the family business writing software. They pay me wages. Not sure how I would report those wages or how they report it

The parent's business would report it as a business expense. Nothing uncommon or special about that. But for you, this would affect your unemployment. You'll need to provide the state your date of employment, and unemployment would most likely stop on that date. If it's determined you were overpaid by the state, you may have to pay some of that unemployment back.

[tk01kj]

No I am not trying to avoid payroll taxes. Does it have to be a W2 if I am self employed, can I submit a 1099 for me instead? The thing is I don't have a registered business if self employed I am just working for myself

[macuser_22]

The question was - what service do you preform that is worth 25K?

If your parents are just gifting you 25K (which this is sounding like) and are treating you as an employee or contractor to be able to deduct it a wages paid, than that is tax fraud if you did not actually do 25K worth of work for them.

Might (probably) get away with it but maybe not and the penalty can be jail time.

[tk01kj]

I don't think W2 would work. They haven't paid me yet and we don't have documented trace of all the services I performed. Does my parents have to be paying from a registered business account for me to file a 1099-NEC, or can they also pay from out of pocket personal account? Just makes me wonder which tax reporting is less hassle, it seems self employment tax is less for both of us.

[macuser_22]

There are many IRS rules to determining self-employed vs employee - type of work, who provides the tools, for the work, who directs the work and how it is preformed self-employed direct and control their own work, employers direct and control employees work.    The facts determine it - you do not get to decide.

See this IRS article.

https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-o...

[VolvoGirl]

One thing you haven't mentioned is how their business is set up.  Do they file a separate business return for it or on Schedule C included in their personal return.  It might make a difference.   Maybe they should just give you a gift and not deal with it on anyone's  tax returns.   They could each give you 16,000 without triggering a gift tax return.  

[NCperson]

@tk01kj something else to consider....because there was the mention of unemployment.... 

are you a dependent of your parents - if yes AND the unearned income (which would include unemployment plus dividends, interest, capital gains) exceeds $2300, you are subject to "kiddie tax", meaning your tax rate would be the same as your parents. 

https://www.schwab.com/learn/story/understanding-kiddie-tax

What is the objective here?  

[Mike9241]

it's not a question of whether a 1099/self-employment will work. if you are an employee and your parents' business issues you a 1099 to avoid the hassles of issuing a w-2 and filing payroll tax returns there are severe penalties.  they include failure to file payroll tax returns, failure to deposit payroll taxes, trust fund failure penalties. and that's just to start. if you have a state income tax, the state will jump on you and your parents for the same thing.    then as an employee, the business is probably required to have workmen's comp insurance to cover you. there are severe penalties for that failure.    then in a worst-case scenario, the IRS throws out their 25K deduction but you still get taxed on it.  if caught there could also be criminal penalties (much higher than civil penalties) and possibly seeing what a jail cell looks like from the inside for your parents and you.  I will admit the IRS would have to audit their return