Imaginative Client

[WhiteOleander]

Ok, clients has no earned income. Receives SS disability. She has two minor children. She is approx. 35.

She has moved out of her house and in with stepmom. Her Stepmom is terminally ill. So, client would like to know if she could take the FMV of the rent she is not paying while living there and claim it as income on Sch C for the care given in exchange for the living expenses.

Of course, the whole purpose is to show earned income for EIC.

I don't think this really sounds legit. But, perhaps I'm being too strict. Is it possible this could be claimed as earned imcome?

[jainen]

It's barely possible

It's barely possible, but not likely. She would have to show a profit motive, and the personal element is very strong. The fact that she is not being paid a fee is pretty un-business-like. Does she have a contract that shows the work requirements and the value of compensation? Is she using specifically marketable skills? Does she keep business records such as time sheets, care logs, expense reports, and invoices? Is she licensed as a business? Is there a plan to serve the general public?

[veritas]

I would do it if she was to go on the payroll with state quarterly reports, a federal ID number and stepmother filed sch h with her personal return and paid fica, and futa taxes.

[WhiteOleander]

I agree with your points. I told her to have her Stepmom pay her each week for the care. Then even issue a 1099 at the end of the year.
But, alas, she wants to do this for 2005.

But, I also warned her to check into the rules for the disability she receives. If she has been declared totally and permanently disabled, she might not want to report income that would be subject to SE tax.

I generally am very leary of these "how 'bout this" scenarios clients come up with. They usually are more trouble than they're worth.

[veritas]

I would nix the 1099 idea. Either it's payroll or nothing.

[jainen]

I agree

I agree. A live-in caregiver is a household employee, not an independent contractor. I had that sentence in my earlier post, but removed it to keep the message directed to the actual question. In any case, she can't set it up retroactively. Let 2005 go, and make sensible plans for 2006.

[WhiteOleander]

I agree with all opinions given.
Thanks.

[jainen]

maximum EIC

I have a client somewhat like yours, but she gets money as well as housing. A young man was injured and requires 24 hour care for life. Insurance pays $200,000 per year to a family member as a caregiver. She hires nurses, maintains the home, and provides other services. Generally she claims net SE earnings of about $75,000. This year she bought a specialized van for $150,000. A careful application of Section 179 gave her maximum EIC.