Does our child need to file her own taxes?

[tryoder]

Our 16 year old daughter is our dependent. She made $8900 of income in 2021 by cashing out tokens she earned in RecRoom (a virtual reality, online video game). She is very artistic so she has been able to make a lot of 3-D inventions and rooms that people purchase in-game from her.  She treats her RecRoom activity as a hobby and she does it mostly for fun and not for the money (she is currently a full time high school student). She received a 1099-SEC from RecRoom for her $8900 earnings (this is her ONLY income). I am confused as to whether or not she needs to file her own taxes. From what I read, money earned as a hobby is never considered "earned income" and if your gross income is less than $12,550 then you do not need to file taxes. HOWEVER, I also read that 1099-SEC is usually seen as "self-employment" income by the IRS and I believe that the IRS will expect you to file if you make >$400 in self-employment income.  How do I answer the question in TurboTax "Is your child required to file?"

[ColeenD3]

Yes, she must file and it is taxable, regardless of how you treat it.

If it is a hobby, then she has unearned income. She must file Form 8615 and she can't take expenses. Hobby income is reported 

To enter hobby income and please follow these steps:

• Sign in to your TurboTax account
• Click on Federal Taxes tab
• Choose Wages and Income
• Scroll down to Less Common Income and click Start to to right of Miscellaneous Income, 1099-A, 1099-C
• Click Start to right of Hobby income

 If it is self-employment, she is over the $400 threshold.

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

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).

1. Type in “schedule c” (or for CD/downloaded TurboTax, click Find).
2. Click on “Jump to schedule c”.
3. Click on the blue “Jump to schedule c” link

Many people are engaged in hobby activities that are also a source of income. For example, some people started selling handmade items during the pandemic. These people must report this income on their tax return.

A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. This differs from those that operate a business with the intention of making a profit.

In determining whether their activity is a business or hobby, taxpayers must consider nine factors.  Hobby

[tryoder]

Thank you for your response. I have begun working on my daughter's own tax form. I do believe that her income qualifies as hobby income per IRS definition (I looked at the IRS website to help make this determination). My new question is...since she received a 1099-NEC from RecRoom (the company that runs the virtual reality game). Would it be best to enter the amount she earned under the "Income from form 1099-NEC" and flag this as an uncommon situation by clicking on "This is not money earned as an employee or self-employed individual, it is from a sporadic activity or hobby."? Or should I do as you originally suggested and just enter it under the "Less Common Income, Miscellaneous Income, Hobby income." If I enter it in both locations (1099-NEC and Less Common Income), this seems to create duplication (?) Thanks. 

[PattiF]

You do not need to enter this in both locations since you are classifying this as hobby income. Only enter this as Less Common Income to avoid duplication of income.

[tryoder]

I added the income from the 1099-NEC as "hobby income" in Turbo Tax. Here are the snapshots of my daughter's current 8615 form and 8615 worksheet. I am confused as to why it shows as "earned income" in the forms. Is TurboTax entering this information correctly? Shouldn't it show as "unearned income"? Should I manually correct the forms?

[DaveF1006]

 According to Opus 17 in his Turbo Tax post, hobby income is never earned income. With this said, if you have access to this form, you can delete the entry in Line 2B since it is in brown. Looks like a duplicate entry anyway since your unearned income is already populated on line 1. 

@tryoder 

[Opus 17]

@tryoder 

Do you have a Schedule C or schedule SE?  That would make the income "earned" and it would mean you entered it incorrectly in the program.  Otherwise, I don't immediately understand why hobby income would be "earned."  I suspect you made a mistake entering the 1099, so that Turbotax assigned it as self-employment income even though you did not intend that.

Because hobby income is "unearned" income, your child will be subject to the "kiddie tax" unfortunately. 

[tryoder]

I am sure I did not say this is self-employment income. I looked in the "forms" section and there is no Schedule C or Schedule SE. I wonder if there is an error in TurboTax? I called a TurboTax helper a bit ago today and was told that I should leave things as is. She told me that line 1 seems to be populating as per the instructions for IRS form 8615. Yet, she couldn't tell me why line 2b in the worksheet shows it as "EARNED income." (She kept saying that, since line 2a is 0, then naturally line 2b would the the full amount of $8900.) I tried to see what would happen if I manually change that line (line 2b) to 0 and my daughters tax liability jumps from $783 federal to $1614 federal (probably from the kiddie tax?). I am so confused...I thought this was going to be a fairly easy return. I am not sure what to do. I want to get it right.

[tryoder]

I wanted to say that I deleted the tax form and started it all over again. Now form 8615 worksheet and form 8615 are populating correctly. (Hobby income shows as "unearned" income) and the amount owed is higher. I am not sure why I had trouble the first time around. I believe that I did not flag the 1099-NEC income as "hobby income" the very first time around. After correcting it and flagging it as "hobby income" the 8615 did not make the correction. Bottom line...if you get into this same problem, deleting the tax form and starting over again, may be the solution or manually changing the number on line 2b would have accomplished the same results.