College student with 1099-NEC for one off work and 1098-T

[spaceman91]

Ok, I need help on this one.  I did some digging and couldn't find similar situations in the answers.

My daughter is a college freshman this year.  We will still be claiming her as a dependent. That part is easy.

She did not have any paying jobs during the school because she never had time and last summer she ended up being asked to perform in a show and was paid. She was paid in a single check, no taxes taken out.  We knew ahead of time this would be the case, and she received a 1099-NEC. She is not a contractor or self-employed, she was a high school student who was given a role in a show before going to college. It was one and done. This pay does not put her into the threshold of needing to file from a dollar amount, but she needs to file because no taxes were withheld. 

There was one thread that kind of touched on this but it was long and confusing and seemed to imply she had to use schedule C.  So, I just broke out the 1099-NEC and read the back.  The back actually reads:

"If you are not an employee but the amount in box 1 is not self-employment (SE) income (for example, it is income from a sporadic activity or a hobby), report the amount shown in box 1 on the "Other income line (on Schedule 1 (form 1040)).  It says the other thing too, later.  But the first thing it says seems to imply that you dont have to be classified as Self Employed for one off activity.

But, I have no idea how to begin this return. Obviously, she has no W-2, just the 1099-NEC. Although she paid no taxes, what she was paid is far below what the standard deduction would be for a single person. But since she is a dependent, I dont know how that works either. Based on other comments things I read, for a dependent, the deduction should be the greater of $1150 or her earned income +$400? as long as it is below the max standard deduction of $12,950

To further complicate things, she received a 1098-T to show the massive amount we paid for her tuition in box 1 and the tiny scholarship/grant amount she received in box 5. 

Any thoughts?  Thanks!

[hbl3973]

spaceman91,

I agree that it is more like babysitting income which I had my children report as simply Other Income.  In light of the formal 1099-NEC, though, you may get a letter from the IRS asking you about the 1099-NEC and but you would then reply with the circumstances.  However, if you are worried about interacting with the IRS, go ahead and do the simple schedule C (she can even use the mileage spent going to and from rehearsals and the performances plus any outlays towards costumes and the like), fork over the 15.3% tax for Social Security and Medicare and let it go.

For the 1098-T, you will use it on your own return unless your income is so high that you don't qualify for the American Opportunity Credit.   IRS Publication 970 states that the income limit is $180,000 for Married Filing Jointly and $90,000 for all other filing statuses.

Assuming you aren't blocked by high income, you enter the 1098-T on your own return.  Your out-of-pocket qualified expenses for the AOC will be the Box 1 qualified expenses minus the Box 5 scholarship minus any 529 plan distributions that were used for qualified expenses rather than things like room and board.  As long as the out-of-pocket qualified expenses are $4,000 or higher, you get $2,500 of AOC credit.

If you are blocked by income limits, then your daughter would file the 1098-T on her return.  Her standard deduction would be the larger of $1,150 or her earned income plus the small scholarship plus $400, though no more than $12,950.  She would need to complete the "kiddie tax" form 8615 though that will do no more that thicken her tax return as her taxable income is zero assuming the performance pay plus scholarship were less than $12,950.

[Vanessa A]

You did not mention how much her 1099 was for.   You are correct, if this was a one time thing that was basically a one off or hobby, it would be considered regular income and not self-employment.  If it is below the amounts you listed, it would not be taxable and she would not need to file a return. (Ex. If it was for $500, she would not need to file a return.) Other income is not the same as earned income so she basically has no earned income.

The 1098-T goes on your tax return, not hers.  As a dependent, it would only go on her return if box 5 was greater than box 1.   Then she would be responsible for taxes on the scholarships and grants that were not used for qualified education expenses. You would possibly be able to claim the education credits to help recoup some of the money you paid for her education. 

Lifetime Learning Credit

• You can take this for an unlimited number of years
• Twenty percent of expenses up to $2,000
• Non-Refundable meaning this can reduce the amount of taxes you owe, but if your tax liability is less than the LLC, your tax will be reduced to $0 and the rest of the credit is lost. 
• AGI is less than $180,000 if married filing jointly 

American Opportunity Tax Credit

• Available for the first 4 years of college
• Max amount is $2,500 per student
• Partially refundable credit meaning if your tax liability is $0, 40% (up to $1,000) is refundable
• AGI is less than $180,000 if married filing jointly 

[spaceman91]

The 1099 was for $3000. One other thing I forgot about is that she received a Travel Allowance Grant from her University when she was accepted to travel to their admitted student day.  They said it is considered reportable income and required a social security number to make the checks. They did not send any tax forms, and I don't expect they will.

Unfortunately, we do not qualify for either the LLC or the AOTC, we're just a little over the limit. (I believe the limit for the LLC is $160 though). It's unfortunate though because her school is very expensive, and I was hoping that paying all that tuition would get us at least a little bit of a deduction.   Box 5 is much much smaller than box 1. 

[imaattion]

As you said, this was not self-employment but a one off thing so just report the amount as other income,

which is the last line of wages and income in Turbo tax "other reportable income" or you can report it as "Hobby Income" The IRS makes a distinction between what you do as a business--ongoing work for profit, which requires a schedule C vs one off or hobbies. The former can deduct expenses and the latter can't so from an IRS view they "prefer" you report it as one-off.

I did not understand your comment "This pay does not put her into the threshold of needing to file from a dollar amount, but she needs to file because no taxes were withheld."No taxes withheld and below filing requirement, no need to file. The standard deduction is the smaller of earned income plus $400 or $12950. If earned income is $750 or less, the standard deduction is $1150.

Regarding the 1099-T, if the scholarship was used for school then nothing needs to go on the return.

As the parent of the dependent you use the 1099-T to claim educ credits on your return

[hbl3973]

LLC is also $180,000 according to publication 970.  And, you are right, even if you didn't claim your daughter as a dependent, she would get no value from either because it is nonrefundable for her.  At this point in time, you might be able to knock up to $7,000 of your AGI if only one of you and your spouse is covered by a retirement plan at work.  See pages 9 and 14 of IRS Publication 590-A for details.  If that shifts you below $180K hurrah!

[spaceman91]

I thought she would have to file for Social Security and Medicare purposes, because I thought we always owed those. I guess I was wrong about that?

So I am just playing around with TurboTax to see what happens and by putting it in that way (as sporadic activity/hobby), it ends up as "other income", which then classifies it as unearned income, which I don't understand at all. Then because it is unearned income, it automatically defaults to $1150 deduction and also fills out form 8615 - Tax for Children who have Unearned Income and computes a tax rate based on my salary.

[imaattion]

It's classified as unearned because it is a hobby not work.

The good news is you don't have to pay self employment taxes about 15%. But you may want to consider was this really a hobby or work that she did for profit? maybe she wants to go into acting so this wasn't necessarily a one off? If so put it on schedule C and pay the self employment taxes.

[hbl3973]

spaceman91,

How much was the scholarship?  The IRS treats it as earned income with respect to dependent's standard deduction, i.e. compare scholarship+$400 to the $1,150 default.  If the scholarship was  more than the 1099-NEC value minus $400, then her taxable income would be zero and the kiddie tax would be zero.  If not, you would want to compare the ~$400+ self-employment tax for Schedule C (15.3% of the net Schedule C income) to the roughly 24% tax on the scholarship+700(=$3,000-$2,300) that would arise via form 8615.

[imaattion]

I think the reply below is misleading

"How much was the scholarship? The IRS treats it as earned income with respect to dependent's standard deduction, i.e. compare scholarship+$400 to the $1,150 default. If the scholarship was more than the 1099-NEC value minus $400, then her taxable income would be zero and the kiddie tax would be zero. If not, you would want to compare the ~$400+ self-employment tax for Schedule C (15.3% of the net Schedule C income) to the roughly 24% tax on the scholarship+700(=$3,000-$2,300) that would arise via form 8615."

The scholarship only gets treated as earned income if you are reporting it as income ie paying tax on it. So it doesn't help with the tax on the 1099-NEC income. You'd only report the scholarship as income if it wasn't used for the purpose it was granted for or if you were doing so because it increased the education credits on the parent's return.

[hbl3973]

imaattion,

You remind me that there is one additional twist in that so long as the scholarship is not specifically designated for tuition and other qualified expenses, one can choose to treat the scholarship as taxable income and include it in the standard deduction equation.  It does receive unearned income treatment insofar as the 8615 kiddie tax goes.  The taxpayer will want to work the NEC income multiple ways to see what costs the least.  My guess is leaving the scholarship alone and paying the kiddie tax will be best since the first $2,300 of the NEC income is excluded from the Kiddie Tax so even at a full 24% ordinary income parent tax rate that works out to about ~$170 while 15.3% of $3,000 is ~$460.  

[hbl3973]

One last set of twists.  You'll need to do the calculations to see what works out best.

(1) If you choose not to declare your daughter as a dependent and she goes the schedule C route, you lose $500 of tax credit but she gets the nonrefundable portion of the AOC, wiping out all of the 15.3% self-employment tax leaving a family outlay of $30 or less.  You have the added bonus of being able to make an IRA contribution of $3,000 on your daughter's behalf starting her on the road to retirement savings. 

(2)  If the amount of the scholarship is more than $2,600 ($3,000-$400) and you make the amount of the scholarship taxable (and it might well have included that travel grant), you can contribute an equal amount to an IRA for your daughter on or before April 18th this year.  (We did that every year our kids had earned income.) This would lower her adjusted gross income and raise her standard deduction so that taxable income becomes zero and the kiddie tax is equally zero.

(3) Finally, if the scholarship is less than $2,600 and you don't declare her as a dependent but make the scholarship taxable, the kiddie tax is somewhat larger because the scholarship is lumped with the NEC money but the AOC of $2,500 would wipe all that out, and you can still make an IRA contribution on her behalf.

(4) Actually there's another twist related to the Retirement Savings Contribution Credit where you make the scholarship taxable, contribute to the IRA and wipe the kiddie tax amount out using the 50% credit for the IRA.  This would only be available if you do not declare her as a dependent and she did not start college before September of 2022.  I have to run now to help prepare taxes with AARP's Tax-Aide program but you can work through those numbers, too.  I strongly suspect either (1) or (2) would be optimal in the sense of total family tax outlays 

[imaattion]

One thing we should all keep in mind, there are specific rules regarding what is self employment (reported on Schedule C) and what is other income or hobby income. It's not a choice of which way works out best for you. In this case the Tax Payer says it was a one off event, not for profit and one unlikely to pursue in the future. If so that is other income/hobby not a business reported on Schedule C.

[hbl3973]

imaattion,

I agree with you that the important thing is the intention of the daughter.  For now we only have the parent's read on that.  It is quite possible that the daughter was looking to earn some money over the summer before college and that a paid opportunity arose which she felt superior to options such as waitressing or stocking shelving at a store which would have been W-2 earnings.  As you had mentioned, she might well also be looking ahead to exploring fine arts as a future career.  The IRS provides a list of 9 factors to consider in deciding if such nonemployee income is hobby or business:

Federal Register Title 26 v3 section 1.183-2 

Ultimately it's up to the family to look this over and decide. 

[Hal_Al]

The 1098-T is easy. It goes on your return and you claim the tuition credit.  If your income disqualifies you, the 1098-T is omitted. It does not have to be reported on either the parent or student return*. 

You are a correct, a one time gig 1099-NEC can be reported as other income or it can be reported as self employment. Other income is unearned income and subject to the $1150 standard deduction  and is subject to the kiddie tax.  The self employed get an (up to) $12,950 standard deduction. The self employment (social security & medicare) tax amounts to about 14.1%. 

*The 1098-T is only an informational document. The numbers on it are not required to be entered onto your tax return. However receipt of a 1098-T frequently means you are either eligible for a tuition credit or possibly your student has taxable scholarship income. 

If you claim the tuition credit, you do need to report that you got one.

You claim the tuition credit, or report scholarship income, based on your own financial records, not the 1098-T.