College Student's 1099-NEC earnings showing as unearned income

[lipinskicm]

My full time college student worked as a construction laborer last summer.  His $5390 in earnings were reported on a 1099-NEC form.  I understand he will have to pay self-employment taxes since no taxes were taken out of his income.  However, TurboTax keeps prompting us to complete Form 8615 referencing his earnings as "unearned income".  Why?

[NCperson]

does he have anything else on his tax return, like a Form 1098T where Box 5 exceeds Box 1? 

are you sure it's the 1099-NEC that is driving the message? 

https://www.irs.gov/instructions/i8615

[KathrynG3]

If he also had more than $2,200 in interest and dividend income, then the IRS requires him to be taxed at your rates, not his tax rates. 

Prior to the American Rescue Plan enacted March 11, 2021, any unemployment compensation was considered unearned income and would count toward the $2,200 threshold.

Therefore, check to make sure your program is updated. 

• In TurboTax Online, close the program, close the browser window, and re-open on a Windows 10 PC using an incognito Chrome browser.
• In TurboTax CD/Download, depending on the level of the program, check in the menu bar under Online or Help to Check for Updates.

For more information, see: What is the 2020 Kiddie Tax? and

What is IRS Form 8615: Tax for Certain Children Who Have Unearned Income - TurboTax Tax Tips & Video...

Regarding your son's Form 1099-NEC, see: What is Form 1099-NEC? - TurboTax Tax Tips & Videos

[lipinskicm]

He are claiming him as our dependent on our taxes, so his 1098T is on our tax forms, not his filing.  Box 5 is not greater than Box 1.

The only info on his taxes is the 1099-NEC.  I don't understand why TurboTax is classifying it as "unearned income".  He definitely worked hard for it.  He was really this company's employee, so very frustrated that they classified him as a non-employee, but regardless he needs to pay the taxes.  Just not sure why TurboTax keeps prompting us to complete form 8615.

[NCperson]

did you tie the 1099-NEC to a Schedule C?

if you look at Schedule 1, does the income appear on line 3?

[tpackert]

I have the same issue here.  College student - last year received 1099-misc for about the same amounts.  This year received 1099-NEC for same type of work.  Last year, standard deduction was the 1099-MISC + $350.  This year Standard Deduction is $1100 because the 1099-NEC income calculates as unearned.  So since earned income is less than $750, child gets standard deduction of $1100.  

This certainly seems like a bug in the classification of 1099-NEC as unearned income.  

I understand the intent of the 8615 to  go after the 'kiddie tax' where children get assets and unearned income taxed at a lower rate.  But this is truly earned income from part time jobs that is being classified as unearned income.

I have tried to do the Schedule-C route but that resulted in Self Employment tax being even worse.  So I deleted those forms and started over this time answered "No" to "Do you have expenses for this income?" question which does not generate a schedule "C".  But the income still shows as unearned income, resulting in a Standard deduction of $1100 instead of the sum of the 1099-NEC's resulting in owing $400 in taxes this year over last year for the same amount of income.

Was this the intent of the law to tax part time college students making a couple thousand bucks at part time jobs at their parents tax rates?  Or is this a bug?  If it is a bug, will it be fixed in time to file this year?

[tpackert]

Searching this forum for "1099-nec unearned income" shows lots of people asking the same questions.

Lots of people reply describing the need to complete a schedule "C" by answering "Yes" to "Do you have expenses for this income?" While it does get the income into the earned category, it results in a Self Employment tax that is worse than the kiddie tax (8615).

I find it difficult to believe that the intent of the changes in law is to raise taxes on college students' part time jobs?

[NCperson]

@tpackert - let me explain the 'self employment tax'... and then it should make sense.

When you are a W-2 employee, 7.65% is withheld for social security and medicare tax. Then your employer matches that, so the federal government collects 15.3% of your income for these two taxes - half paid by you and half by the employer.

But for a 1099-NEC, that doesn't occur on the weekly paycheck, so the IRS charges a self employment tax of 15.3% to collect what would be collected if there was a W-2.  that is a tax that you can't get out of.  But then, the IRS will deduct HALF from your income to mimic that your employer normally pays half.

it really puts you in the same position as if you were a W-2 employee.  Without this mechanism, most everyone would want to be a 1099-NEC employee and then Medicare and Social Security wouldn't be collecting anything.  

make sense? 

[tpackert]

@NCperson 

Thanks for the reply.

In 2019 my dependent student made about $3000 and received 1099-MISC - when we files taxes, the Std Deduction became $3350 because she made more than $750.  So with Std Deduction of $3350 she ended up owing $32.

In 2020 she made $3400 doing the same type of part time work and received 1099-NECs instead.  I selected NO Expenses option so that it did not generate the schedule C.  (I have done this several different ways by deleting forms)  This year, she has $3400 in 1099-NEC income.   Turbo Tax calculated a Std Deduction of $1100 because Earned income is under $750.  So with $2300 income she now owes $400+. 

Quite dramatic when you look at 2019 and 2020 side by side.  With 1099-NECs not counting as earned income which triggers the $1100 std deduction.

Was this the intent of the tax law changes from MISC to NEC?  The work is the same, the pay is the same but in 2019 it was earner income and in 2020 it is unearned income.

[CatinaT1]

Income reported on Form 1099-NEC must be included on Schedule C. If you entered the 1099-NEC but did not complete the Schedule C, you will get this error. 

  

Revisit the section where you entered the Form 1099-NEC if you entered it on its own and delete that entry, by following these steps: 

  

1. Open TurboTax. 

2. On the top right corner of TurboTax online screen, click on Search (or for CD/downloaded TurboTax locate the search box in the upper right corner). 

3. Type in “1099-NEC” (or for CD/downloaded TurboTax, click Find), 

4. Click on “Jump to 1099-NEC” 

5. Click on the blue “Jump to 1099-NEC” link 

  

This will bring you a summary of all Form 1099-NEC that you have entered.  Click Delete or the trash can icon next to each one. 

  

Next, you will re-enter the Form 1099-NEC as part of the Schedule C so that the income is reported directly as part of your Business Income and Expenses and within the correct form and section of your return. 

  

Follow these steps to go to the Schedule C section of your return: 

  

1. On the top right corner of TurboTax online screen, click on Search (or for CD/downloaded TurboTax locate the search box in the upper right corner). 

2. Type in “schedule c” (or for CD/downloaded TurboTax, click Find). 

3. Click on “Jump to schedule c”. 

4. Click on the blue “Jump to schedule c” link 

  

If you already have created a Schedule C in your return, click on edit and go to the section to Add Income.  This is where you will re-enter the Form 1099-NEC.  

  

If you do not already have a Schedule C in your return, follow the prompts and enter the information about your work/business for which you received the Form 1099-NEC.  Then continue through that section to Add Income and enter the Form 1099-NEC along with any additional income you received for that business.   

  

Once you have completed this, the error should be eliminated.  

[NCperson]

you may be assuming that in 2019 you did it correctly when in fact it may have been was incorrect. 

@CatinaT1 's instructions make sense to me.

when you receive a 1099-NEC (or previously a 1099-MISC) for earned income, you are going to get hit with 15.3% tax, regardless of the standard deduction.   In a perfect world a W-2 employee's salary / hourly wage is 15.3% less so it works out the same.