Kids under 16 and SE tax

[JenMO]

Boys worked sporaticly for different farmers, just helping out when needed. Would this income be subject to SE tax, or could it be considered other income? One did get a 1099 for his work, but others were from several different people. Parents were honest enough to tell me, but doesn't seem quite fair for the boys. What has anyone else done with this type of situation?

[gkaiseril]

The 2 exceptions for FICA and Medicare wages for a child under 18:

1. Newspaper delivery person.
2. Child is in employment of parent(s) .

So the income is subject to SE if over $400.00.

Remember that the child could set up a traditional IRA or ROTH IRA with the earnings and claim the Retirement credit or reduce his/her AGI and this could help reduce the income tax but not the SE tax.

[Gretel]

I think it is a fact and circumstance deal. By far not all 1099 type employment is subject to SE. If someone is doing something out of his ordinary line of business as a one time deal, this income is not subject to SE.

With students it is a little more difficult. One could argue their ordinary line of work is being a student. On the other hand they don't have any line of work so everything could be their business.

The amount in question is probably higher than $400? Otherwise SE doesn't even apply.

Depending on the total amount I would report this income on line 21.

I sometimes tell my clients who are to talkative (meant in good way) that I am their friend but not their budy.

[Burke]

I have a couple of students who refereed soccer games this year. (One did it last year too.) They both got 1099's and will be subj to SE tax but not income tax. Do we have any leeway on this?

[AJsTax]

I have a couple of students who refereed soccer games this year. (One did it last year too.) They both got 1099's and will be subj to SE tax but not income tax. Do we have any leeway on this?

If they are not in a "trade or business" on a continuing basis they are not permitted to file a schedule C. See the first page of instructions for the Sch C. Put that on line 21 and be done with it.

[Gretel]

I agree with AZ tax. See also TC Memo 2009-228 pg 6. Court held that 2 months is not enough to be in a trade or business.

[FEDUKE404]

Retirement credit for them???

....
Remember that the child could set up a traditional IRA or ROTH IRA with the earnings and claim the Retirement credit or reduce his/her AGI and this could help reduce the income tax but not the SE tax.

Just curious: How do you get around these IRS requirements for claiming the retirement credit (also assuming the "boys" are being claimed as a dependent)??

Eligibility requirements: To be eligible for the [Retirement Savings Contributions] credit you must have been born before January 2, 1992, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person’s return.

As for dodging the SE tax, these boards are FULL of similar discussions. Group A says income is subject to the tax via Sch C/SE, Group B says it must be a "continuing business" so no Sch C and no Sch SE.

I tend to agree with Group A, but if Group B flies then I might consider a VERY lucrative consulting job (starting in Feb and ending in November), then report some "miscellaneous" income on line 21 and thumb my nose at the SE tax since it wasn't a continuing business. Think that would fly??????

FE

[RitaB]

Nice catch, FEDUKE404

Nice catch on the Retirement Savers Credit.

Just wondering, you seasonal tax preparers do pay SE, don't you?

[gkaiseril]

Depending on the total amount I would report this income on line 21.

If it is seasonal and recurring year after year, it is SE. If it occurs once it might not be SE.

[gkaiseril]

Your are right, But it is still worth while for the student to set up an IRA. The market might have made a comeback as he enters college or he could have a very nice nest egg at 59-1/2.

[gkaiseril]

I agree with AZ tax. See also TC Memo 2009-228 pg 6. Court held that 2 months is not enough to be in a trade or business.

The student did work while the attorney did not perform any work.

"Petitioner argues that her activity was a continuation of a trade or business carried on previously; i.e., in the 1980s and in 2000. However, even if her activities in the past amounted to a trade or business, which we do not decide, there was a substantial lack of continuity between her prior work and her efforts in 2003. Petitioner did not work as a contract attorney between 1988 and 2000 while she worked for the department. She
also did not work as a contract attorney in 2001 or 2002, and her activity in 2003 was sporadic. Accordingly, under the facts of this case petitioner’s activity in 2003 was not a continuation of a trade or business carried on in any previous period. Petitioner did not decide to work as a contract attorney until mid-January of 2003, and she returned to work with the department on or around March 25 of that year. Therefore, the alleged trade or business existed only from mid-January to late March, or just over 2 months. This is not a substantial time period.4

"Even though petitioner expended some time and effort in an attempt to find work as a contract attorney during this period, her involvement was not regular and continuous. Her only activity was her attendance at the ABA meeting for 4 days in February, at which petitioner marketed herself to other attorneys. She did not negotiate for or perform any legal services as a contract attorney for any party during this period. Finally, she abandoned her efforts upon returning to the department in late March. Accordingly, her activity was neither regular nor continuous."

http://www.ustaxcourt.gov/InOpHistoric/FOR9REST.TCM.WPD.pdf

[Gretel]

Gkaiseril, while I agree with you that actual work performed by the student is somewhat different then this case it doesn't say that outright (like "because she didn't perform any actual work"). Instead the case elaborates on continuous and regular (effort - my words) and must be engaging for income or profit.

There certainly is an income motive for a student if we can it that. The same "income" earned by another taxpayer who has other income sources would surely disqualify him from being in biz and make it a hobby.

[taxea]

Requires Sch C if primary purpose is for income or profit and the TP is involved in it with continuity and regularity...I don't think this qualifies. I would put it on Ln21 and note it as not subject to SE as it is not primarily for profit nor does TP engage in the activity with continuity and reglarity.

[gkaiseril]

Requires Sch C if primary purpose is for income or profit and the TP is involved in it with continuity and regularity...I don't think this qualifies. I would put it on Ln21 and note it as not subject to SE as it is not primarily for profit nor does TP engage in the activity with continuity and reglarity.

Do you think this young man did this work as a charitable act?

Farm youth regularly perform seasonal field work, so this type of work is a regularly occurring job. And if this young man performs this work in 2010 again, the argument becomes very weak. For work to be 'regularly occurring' it does not need to contiguous throughout the year but can be seasonal.

The issue is that the tax code has not kept up with the changes in youth employment. Notice that the only exceptions are for 'newspaper delivery' and working for parents. But with the newspaper business scaling back on home delivery and street vendor sales, and the smaller sized families and fewer family run businesses and farms the youth are seeking other forms of work like baby sitting, yard work and farm field work and chores for people other than their parents and in some cases these jobs do not pay the worker as an employee. Some of these youth can make over a thousand dollars in a summer if they are paid at a competitive amount. But the SE tax starts at $400.00 which has not been adjusted for inflation since it was introduced.

Also the youth that work as employees and are paid on a W-2 have FITW, FICA and SITW and many pay income tax either at the federal or state level. Maybe they should not be taxed. Maybe these workers should claim 'Tax Exempt' on their W-2 so they do not have FITW and do not need to file a tax return. I believe a large national CPA firm advised their summer interns to do this one year on the basis that they were students and should not have to pay taxes.

But you can do what you want.

If the IRS challenges the other income, how much are you going to charge the client to defend this?
If the IRS wins the challenge how are you going to deal with the interest and penalties, and the additional taxes when you lose.
If you use line 21 warn the taxpayer and parents that this could be challenged by the IRS.

[CarolToppCPA]

Se exemption for household employees too

The issue is that the tax code has not kept up with the changes in youth employment. Notice that the only exceptions are for 'newspaper delivery' and working for parents. But with the newspaper business scaling back on home delivery and street vendor sales, and the smaller sized families and fewer family run businesses and farms the youth are seeking other forms of work like baby sitting, yard work and farm field work and chores for people other than their parents and in some cases these jobs do not pay the worker as an employee. Some of these youth can make over a thousand dollars in a summer if they are paid at a competitive amount. But the SE tax starts at $400.00 which has not been adjusted for inflation since it was introduced.

Amen to that gkaiseril! I am seriously thinking of contacting a few members of congress to create a bill to exempt children under age 18 from paying the SE tax. $400 is was too low a threshold. It kills the entrepreneurial spirit and work ethic in teenagers. My 17 yo dd made $687 giving piano lessons to children and must pay $90+ in SE tax. Ridiculous.

BTW, more than newspaper delivery and working for parents are exempt from SE tax. Household employees under age 18 are exempt from SE tax. Household employees include babysitters, lawn mowing, etc.

I posted a blog post about babysitting income:

http://teensandtaxes.com/babysitters-do-they-owe-income-tax/

Also, many times teenagers are misclassified as ICs and are given 1099MISC when they should be employees with FICA & SS withheld for them. Maybe that happened in this case.
Another blog post on that topic:

http://teensandtaxes.com/teenager-misclassified-as-independent-contractor/