paper route

[taxdude71]

Have a client that we filled in son's return for. Son falls under minor paper route rules. Client recieved IRS notice attempting to collect SE tax. I responded with a letter. IRS response back was to admit not subject to SE, but then refigured standard deduction without the paperroute income. Basically they are saying it is not earned income. Anyone else run into this?

[Bees Knees]

The standard deduction worksheet says the following:

Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services. It also includes any amount received as a scholarship that is included in income. Generally, earned income is the total of the amount(s) reported on Form 1040, lines 7, 12, and 18, minus the amount, if any, on line 27.

Paper route income for a child exempt from FICA, FUTA, and SE tax is not going to be reported on lines 7 (W-2 wages), line 12 (Schedule C income), or 18 (Schedule F income). You are going to report it on line 21 as other income. Line 21 income may or may not be considered earned income. I think the worksheet saying “generally” means there could be exceptions to the line 7, 12, and 18 rule. Possibly, under certain circumstances, some amounts entered on line 21 could be considered earned income, even though that is not what the standard deduction worksheet says. I would write back and say it IS earned income. It is simply not subject to FICA or SE tax, per the code. Whether it goes on line 7, 12, 18, or 21 is irrelevant. It is earned income since it is earnings from personal services.

[Bees Knees]

Another example of where the Standard Deduction instructions are wrong is in the case of guaranteed payments from a partnership. They flow to the 1040 on line 17 (Schedule E) and is subject to SE tax. Obviously guaranteed payments are considered earned income. So I would make the case that the standard deduction worksheet instructions are not clear or always correct.

[Uncle Sam]

Paper Route

Although not applicable in this particular case, wouldn't the ability to use the income for purposes of making an IRA contribution (whether it be traditional or ROTH) be a contributing factor in that it in fact IS earned income?

[ChEAr$]

Although not applicable in this particular case, wouldn't the ability to use the income for purposes of making an IRA contribution (whether it be traditional or ROTH) be a contributing factor in that it in fact IS earned income?

I think that's putting the cart before the horse. (grin

Any IRA custodian will gladly accept money and leave it to individual to say whether or
not it qualifies.

[taxdude71]

I've already made that argument in writting. The IRS is still sedning letters. I'm waiting for a POA form the client before I call them. I've done plenty of returns in the past with paper routes and never had this problem.