Does my daughter even have to file a return?

[PrivateIdaho]

My daughter is a college student and earned about $3,000 at school. Over the summer she worked at a place that paid her $6500, totaling $9500. Neither employer withheld any taxes. The second employer reported the income on a 1099-MISC form.

According to the IRS website, I don't think she even needs to file, but TurboTax keeps calculating that she owes $906!

So what's going on? Do I misunderstand the rules or is TurboTax broken?

Thanks!

[DoninGA]

Yes, she must file a tax return.  Her income is from self-employment and since it is more than $400 it has to be reported on a tax return.  She will need to use Schedule C to report the self-employment income and expenses.  The schedule C is included with a personal tax return, Form 1040.

If you are claiming her as your dependent then she must indicate on her tax return that she is a dependent.

[SharonD007]

Your daughter must file a tax return because the income she received on her 1099-MISC is more than $400.  The balance that she owes includes self-employment taxes on the 1099-MISC income.  She'll report the income from her 1099-MISC income on ‌Schedule C of her tax return. The IRS considers self-employment income as a business, so the good news is that she'll be able to deduct common business expenses from that income. To enter the business and self-employment income, follow the steps below:

1. Open TurboTax
2. Select Wages & Income
3. Select Self-Employment Income and Expenses
4. TurboTax will guide you through the interview screens to help you enter the income.

Review the TurboTax articles Reporting Self-Employment Business Income and Deductions for more information on business deductions.  For additional information, review What self-employed expenses can I deduct? and How do I report income from self-employment? 

Refer to the TurboTax article The Self-Employment Tax for an explanation of self-employment taxes.

[PrivateIdaho]

Thank you very much for your help, but she’s not self employed. She worked as a research assistant at a university for six weeks over the summer. She doesn’t file as self employed and doesn’t have any paperwork to show that she’s self employed. She doesn’t have a side gig or anything. During the school year she’s an academic tutor.  Does this change anything? The poor kid is facing a $900 tax bill even though she only earned $9500 all year. Thanks.

[Opus 17]

---

@PrivateIdaho wrote:

Thank you very much for your help, but she’s not self employed. She worked as a research assistant at a university for six weeks over the summer. She doesn’t file as self employed and doesn’t have any paperwork to show that she’s self employed. She doesn’t have a side gig or anything. During the school year she’s an academic tutor.  Does this change anything? The poor kid is facing a $900 tax bill even though she only earned $9500 all year. Thanks.

---

That's a bit complicated.  If she was self-employed, she owes 15% self-employment tax even though she doesn't owe income tax.  However, being a "student" is not considered self-employed, and the stipend is not considered "compensation for work" since it is technically education and not work.  This is probably why the school reported the stipend on a 1099-MISC instead of hiring her as a W-2 employee.

The next question is, was she a research assistant at her own college, or someplace else, and if someplace else, did she get school credit for it?  Or was the stipend paid by a granting agency rather than the money passing through the school?  If either answer is yes, then this is not self-employment. 

However, if she was working at a different school, and it was more work for hire rather than education, then it might be considered self-employment even though the school reported it differently.  I would need more details to think about that situation.

Because it was reported on a 1099-MISC, it is less likely that she would be audited for failing to report it as self-employment.  Assuming that it was "School", she needs to answer the test questions as NO -- not like work, not for a profit, not similar to any past or future job (because it's not a job, it's school).  She should file a return even though no tax is owed, because the statute of limitations only starts if she files -- if she files, the IRS has 3 years to come back and ask whether this was really school or a job.  If she never files, the IRS can theoretically audit her at any time in her life.  

If you want to discuss more whether this counts as a job or education, I would need to know more about the position and who paid the stipend.  

[PrivateIdaho]

Wow, that was a thorough and thoughtful answer! 

My daughter works during the year in the employ of College#1 as an academic tutor. They sent her a W2 with College#1's own name and address on it. They withheld no taxes.

She spent the summer working at College#2 as part of a government program called Research Experiences for Undergraduates (REU - https://www.nsf.gov/crssprgm/reu/). College#2 sent her a check at the end of the summer for $6500 and withheld no taxes. The 1099-MISC form is from College#2 and not some other agency or company.

Over the summer she learned how to work with special electron microscopes and lighting equipment and software to support the research the lab was performing.
  So I think its safe to call this more of an educational opportunity than skills-for-hire.

Thanks for your careful consideration! 

[Opus 17]

@PrivateIdaho 

Being aware that I am not your tax professional and I will not be around if you are audited, it is my thinking that this is an educational stipend and not self-employment.  Keep documentation in the unlikely event your daughter is audited.  In Turbotax, you need to answer the 1099-MISC test questions all away from the concept of "working for money"--even though your daughter probably showed up every day and "worked", it was education.

Also, if you are using turbotax online, it is possible you were upgrade to a premium version for self-employment and already created a schedule C if you are being shown self-employment tax.  You should still file a return for your daughter**, but you may need to go to the Tools Menu and select "Clear and Start Over" to downgrade back to the free version and remove the schedule C.

**In my earlier answer about filing, I forget to consider the impact of unearned income.  Unearned income is income not from working.  It usually includes things like bank interest and dividends, but in this case, it also includes the summer research fellowship.  For children who are still dependents, their unearned income is sometimes taxed even if it would not be for an adult who was not a dependent.  You should at least prepare a return to see if your daughter is in this situation.

https://www.irs.gov/taxtopics/tc553