Does my daughter have to file a Federal Tax return? (income below threshold but some on 1099-MISC)

[Chris4121]

My daughter is a full-time college student. In 2024, she had a part-time job on campus; she earned $2,334 and received a W-2 for it which had no federal tax withheld. She also had a summer internship, where she worked in a laboratory at a different college and earned $3,500; that employer sent her a 1099-MISC instead of a W-2. No taxes were withheld from it either. In total, she earned $5,834, which is below the $14,600 threshold I see in the IRS "Table 1-1. 2024 Filing Requirements for Most Taxpayers" sheet. If her summer internship employer had sent her a W-2, her standard deduction would be above $5,834 and she'd owe nothing, and we'd probably file just to have record of her having filed a tax return. But because the summer internship employer gave her a 1099-MISC, it appears she'd owe $308 if she files (which is baffling to me) because "miscellaneous" income is outside her standard deduction. Since her total income is below $14,600, can she just not file and avoid paying an unnecessary $308? 

[Vanessa A]

Yes.  If she worked as an independent contractor and received more than $400, she will need to file a tax return even though her overall income is below the standard deduction.  

The 1099-Misc is treated as self-employment income.  This means she has to pay Self-Employment taxes of 15.3% on that income. 

No.  She cannot just not file and avoid paying the taxes. 

[Opus 17]

Yes, she must file.  Look at the rules for dependents with unearned income.

The internship is considered part of her education. That means it is not considered "work", and is not subject to social security or medicare tax (self-employment tax).  It should be reported as a scholarship, or you can use "hobby" income in Turbotax, it is not self-employment on schedule C.

However, the downside to being income not earned from working, is that she is subject to the "kiddie tax". This tax was mainly created to tax investment income at a higher rate, so the parents couldn't get a tax break by putting investments in a child's name, but it applies to all unearned income.

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

[Chris4121]

Thank you very much Vanessa A! 

It's frustrating that the university didn't consider her an employee. She worked there in the summer of 2023 also and got a W-2 and didn't owe any federal taxes on it, even though she earned more in 2023 than she did in 2024. I recognize that if the university had put her income on a W-2 in 2024 they'd have withheld social security and medicare, but those amounts add up to much less than 15% she now owes. Oh well, it doesn't sound like there's anything we can do about it at this point. 

Thanks again for the speedy and concise reply!

[Chris4121]

Thank you Opus 17.

Her income feels like "earned income", not "unearned income", since she earned it by working in their laboratory. The university where she had the summer internship was not the university where she goes to school. She goes to school in another city, but came home for the summer and worked at a local one. The (summer internship) university classified all $3,500 of it as Box 3 "Other Income" on a 1099-Misc. 

[Opus 17]

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@Chris4121 wrote:

Thank you Opus 17.

Her income feels like "earned income", not "unearned income", since she earned it by working in their laboratory. The university where she had the summer internship was not the university where she goes to school. She goes to school in another city, but came home for the summer and worked at a local one. The (summer internship) university classified all $3,500 of it as Box 3 "Other Income" on a 1099-Misc. 

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True, research internships and stipends often seem like "work", but the IRS classification as unearned income is quite clear.  If it was an internship at an outside company unconnected to her education it is clearly work and should be on a W-2.  Internships that are preformed at outside companies but arranged by a college and required for a degree are a bit of a gray area.  But a summer research stipend, fellowship or internship performed at a college with primarily an educational purpose is clearly unearned income.

See for example here.

https://www.irs.gov/taxtopics/tc421

This is not a tax-free scholarship, but you will note that for taxable fellowships, the instruction is to report as other income on schedule 1, not as self-employment on schedule C.  There is a lot of other tax information on when internships are education vs work, if you really feel the need for me to drag out more proof.  

And, note that if you did report it as self-employment income on schedule C, she would not owe income tax, but she would still be required to file and would owe about $525 in self-employment tax, which is obviously more than the kiddie tax on unearned income. 

[Hal_Al]

@Opus 17 said "It should be reported as a scholarship, or you can use "hobby" income in Turbotax, it is not self-employment on schedule C"

I agree (I also agree it's not all that clear). The way you enter scholarship income is: 

 Enter at Educational Expenses and Scholarships, under Deductions and credits (not the income section).

If the student does  have a 1098-T, one of the follow-up questions, in the 1098-T interview,  will be do you have any scholarships not shown on the 1098-T.  Enter the additional scholarship/stipend there.   At that scholarship screen, enter the amount of the grant. When asked if any was used for room and board, answer yes. Then enter the amount you want to be taxable (usually all of it), in the pop up box. R&B are not "qualified educational  expenses".  So, this is how you tell TT that it is taxable. Note the wording at that screen “or other expenses”. You didn’t have to literally use the scholarship for R&B.  This will put it on line 8r of Schedule 1.

Scholarships are a hybrid between earned and unearned income. It is earned income for purposes of the $14,600 filing requirement (2024) and the dependent standard deduction calculation (earned income + $450).  It is not earned income for the kiddie tax and other purposes (e.g. EIC).  For grad students and post grad fellows, scholarship, stipend and fellowship income is earned income ("compensation") for IRA contributions. Taxable scholarship goes on line 8r of Schedule 1, causing TT to treat it as earned income for the standard deduction calculation for dependents. 

This means that her income is under $14,600, so she doesn't need to file.  You may want to file anyway to document the reporting of the 1099-MISC income, in case the IRS computers are looking for it. 

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