11 yr daughter with income

[FEDUKE404]

Learn something every day!

Once again I agree with Koss.

The comment about the support issue was essentially a little FYI for the original poster, as (hopefully) we all know the issues related to that dependent lottery winner who banks the money.

OTOH, I still think the daughter would be on extremely thin/melting ice with the IRS to try to avoid any SE tax from a (we don't know yet!) Form 1099-MISC.

Of course, from the tax court example, I'm now intrigued to know if I can in my spare time paint my neighbor's houses, get a couple of thousand dollars for doing so, and not face any SE tax because the painting "has no connection" with my accounting occupation? I LIKE that idea!! (And there's no need to say "Sch H" perhaps to that little ole lady either.)

But, as the old saying goes, "never say never."

Enjoy the weekend!

FE

[Koss]

Good Golly!! - I cannot believe the suggestions to put the income on line 21 to avoid SE tax or to put it on line 7 (without any W2 ) as wages. Are you maybe trying to call the income a "prize" or an "award" or something similar? There are some gray zones in IRS rules, but this income does not fall into one!

There is a sustainable argument for the "one-shot deal." It's based on the idea that income from a casual "side job" is not subject to self-employment tax because the person is not engaged in a trade or business.

I concede that this argument is weaker, and less likely to be accepted by the IRS, when there is a contractual agreement for services, and when the income is documented on Form 1099-MISC.

There is a tax court case supporting this position, but I don't think it involved a 1099-MISC.

If I remember correctly, some guy who was a plumber or an electrician by trade helped out his elderly neighbor by installing an automatic garage door opener, and maybe doing some other "odd jobs," such as painting, which had absolutely no connection to his occupation. The woman paid the guy something like $700 throughout the year, and no, she did not issue a Form 1099-MISC.

The guy was honest enough to report the income--on line 21. Without paying self-employment tax.

The IRS tried to move it to Schedules C and SE.

The tax court said no, that's not a trade or business.

One other aside issue: Things might get a little sticky on the "50% support" rule for the parents' dependency exemption. With a little proper planning that trap should be avoidable.

Probably not as much of an issue as you think. The original post said the guy planned to put the money in the girl's college fund.

If a person's income is not actually spent during the applicable tax year, on expenses that are considered to be part of that person's support, then the income is not support.

Therefore...

A 20-year old college kid wins the lottery, and suddenly has $2.4 million in AGI for the year. If he puts it all in the bank, and his living expenses continue to be paid by his parents, then he is not providing more than half of his own support. Still a qualifying child. Parents might even get EIC.

This could conceiveably happen if he received the lottery payment near the end of December.

[FEDUKE404]

You want to do WHAT?!?

Good Golly!! - I cannot believe the suggestions to put the income on line 21 to avoid SE tax or to put it on line 7 (without any W2 ) as wages. Are you maybe trying to call the income a "prize" or an "award" or something similar? There are some gray zones in IRS rules, but this income does not fall into one!

This is not a paper route, and the girl is not working for her parents. Assuming a Form 1099-MISC is forthcoming, with the facts given it MUST be self-employment income. (I still repeat my prior experience with a person who had a similar "one-time" event and who received all payments reported on Form W2, over a multi-year period, depending on when/how often the ads ran on TV.)

An age exemption for dodging the SE tax is also a new one on me.

The explanations given by Koss are superb. If income is on a W2, "employee" business expenses probably will not help much due to itemizing and Sch A misc deduction issues. If income is on a Form 1099-MISC, "every little bit helps" when you fill out the Sch C.

One other aside issue: Things might get a little sticky on the "50% support" rule for the parents' dependency exemption. With a little proper planning that trap should be avoidable.

FE

[Koss]

I don't think the work described in the original post falls within the scope of the exemption you are describing.

The original author has made it clear that she will not be paid on a W-2. And it certainly sounds like the 11-year old will get paid directly by some other business entity. She is not working for her dad.

[gkaiseril]

is based on the chance that this is a ONE time deal and it will not be a huge sum of money. The age of the girl would not put her on the hook for SE tax. That is my point, if she indeed continues to pursue an acting career that would be a whole differant deal.

See page 5-24 TTB for exception. Children under 18 selling newpapers and magazines. Children emplyeed by their parents and paid on a W-2 are not subject to Fica and Medicare.

[Koss]

is based on the chance that this is a ONE time deal and it will not be a huge sum of money. [b]The age of the girl would not put her on the hook for SE tax.[/b That is my point, if she indeed continues to pursue an acting career that would be a whole differant deal.

There's an age exemption for self-employment tax?

On what authority is this based?

[LawrenceGR]

This

is based on the chance that this is a ONE time deal and it will not be a huge sum of money. The age of the girl would not put her on the hook for SE tax. That is my point, if she indeed continues to pursue an acting career that would be a whole differant deal.

[Koss]

Line 7 or Line 21

Edsel is advancing an argument that if it is really just a one-shot deal, and the girl is not going into the "child actor" or "radio voice-over" business, and there is no real intent to establish such a business or to seek out further engagements, then it does not need to be reported as self-employment income. It could go on line 21.

I agree that this is a viable argument. It depends on the individual facts and circumstances. If the "one-shot deal" involves a contract of some sort, that calls for eight appearances over the course of five months, with specified compensation for each appearance, that starts to look like a genuine business activity, even if the kid only gets one check, and never does anything like this again.

But based on the specific fact pattern, it might not be subject to self-employment tax.

I do not understand LawrenceGR's assertion that it could be reported on line 7.

The only way I could see that happening is if the taxpayer wanted to go through the motions of challenging her status as an independent contractor.

It's either self-employment income, or it's a casual job that is not a business operation.

I don't see how it could be characterized as wages.

[LawrenceGR]

Line 7

The income could be put on Line 7 as wages, sure it would be taxable but no SE tax. This also opens the door for a ROTH or a 529.

[Edsel]

Line 21

CrawDad, if this TRULY is a one-time phenomenon, I might try to list the income on line 21 of your daughter's 1040. This will eliminate self-employment tax.

Having done this, however, you have defined her income as something other than "earned" income. This will negatively impact the parents' return, as the totality of her income must now be taxed at the parents rate. So the above strategy meets a point of diminishing return.

Still wanna try this by yourself?

[Koss]

Self-Employment

Okay, so your daughter has begun working as an independent contractor.

You don't need to take any action at this time with respect to federal income taxes, and it is unlikely that any action is required at the state level.

For federal tax purposes, your daughter is operating a business entity known as a sole proprietorship. A sole proprietorship does not need to formed, established, registered, or created. The entity arises out of the conduct of the person. If you work as an independent contractor, then you are operating a sole proprietorship. That's all there is to it. The tax ID number of a sole proprietorship is the person's social security number. The name of the business entity is the person's name. If the person is not renting an office or something, then the principal place of business of a sole proprietor is usually his or her home.

Your daughter would need an employer identification number if she was going to hire employees and pay wages to them while operating her business. That's obviously not going to happen.

If you want to use a fictitious name for your daughter's business affairs, whether it is a "business name" such as Tina's Modeling Services, or a "screen name" that is easier for people to remember and pronounce, then you would probably need to register the fictitious name with your state authorities. This is usually referred to as a "doing business as" registration. But that doesn't really have anything to do with taxation.

Hope this helps...

Keep good records of any expenses incurred in the course of the business.

Download, print and study Schedule C and Schedule SE, and their instructions. These are the two forms that are used to report self-employment income. Your daughter will file a Form 1040 like anyone else. But Schedule C and Schedule SE will need to be attached, and these forms are the guts of the return.

A sole proprietorship, by definition, is not a business entity that is separate from the individual. Unlike a corporation or partnership, there is no tax return for the business. The person IS the business entity, and the business entity is the person. Self-employment income is reported on the person's individual income tax return.

[TX Dad]

Thanks for all the replies... But I get the impression many of you misunderstood my question. I was not looking for investment advice, wasn't even looking for advice on saving on the taxes. I was looking for information on what I need to do right now to keep this on the up-and-up with the IRS

I'll restate from my original post:
_____________________________

In the meantime, I want to make sure I do things correctly. Do I need to file some sort of self-employment paperwork & taxes for her income?

Any ideas what I should be doing to make sure to keep the IRS stuff on the up-and-up
___________________________

She is not being paid as an "employee", she is being paid as an independent contractor to whom they will simply cut a check to- the amount of the check will depend on the amount of cities that the commercials are ultimately scheduled to run in, which is why I currently don't know how much the final tally will be.

So right now I just want to make sure I do "the right thing" in regards to the IRS. I don't want to be hit with penalties (or other things) down the road. Just want it to be completely on the up-and-up.

[Koss]

Investment Advice

Tax professionals certainly do not give investment advice. If you want genuine, professional assistance in making investment decisions, then you have to talk to someone who has a securities license.

My personal, nonprofessional opinion is this:

If the girl is eleven years old, the "higher education" time line is six to seven years out. Bonds or certificates of deposit are not the best option. You'll be lucky if you break even after you account for the impact of inflation.

The economy is in sad shape right now, but it's actually a good time to buy stocks. Don't try to pick individual stocks. Stay away from commissioned investment reps and mutual funds that charge a sales fee with each purchase. Pick a no-load index fund, such as the Vanguard S&P 500 Index Fund, which invests in the broad US stock market.

Or choose two or three exchange-traded funds for some geopolitical diversity. Spread the money among European, American, and Asian index funds, such as SPY, IEV and VPL (stock symbols). This strategy would require a traditional brokerage account. Check out sharebuilder.com. They have the lowest commissions around.

[FEDUKE404]

Options

I agree that the best route is probably to go with a Roth IRA and perhaps with a Coverdell ESA, realizing of course that neither will save you current taxes. If that is the goal, a traditional IRA would do that although for a very young person (at least under present tax laws) that's not the brightest scheme. Of course, any such account will require a "custodian" because the actress is a minor.

The poster said this is apparently a "one-time"event, so we are not talking about the need for bringing in the CPAs, tax attorneys, investment bankers and trust funds. (Quite frankly, the tax bite on $5k-$10k of income would not be that terrible anyway.) Conservative investments should be the path to take, and such advice should be readily available from a person knowledgeable in that field.

As for the Form 8615, remember that applies only to investment income. That may or may be a near-term factor.

I personally know someone who "fell in" to a similar event....actually was doing some banking business and ended up being filmed for a regional TV commercial that ran for a while. This person was paid wages (via a W2) and the wages were apparently based upon union scale for actors or something along that line.

FE

[Koss]

Coverdell ESA, Roth IRA

Even if this is just a "one shot" deal? I really don't foresee any further work coming from this. It was purely a right time right place thing, and she's not trying to do this as a career.

Doesn't matter. You may have a rare opportunity to stash part or all of the earnings in a tax-sheltered account. It won't avoid taxation of the income right now, but that may not be much of an issue anyway. Are you sure it's self-employment? Or will your daughter receive a Form W-2 with tax withheld?

Either way, some of the money can be stashed into a Roth IRA, and some of it can go into a Coverdell Education Savings Account.

With both accounts, the money can grow tax-free over time. The money can be withdrawn, with no tax due on the earnings, if the distribution is used to pay college tuition.

Yes, this applies to a Roth IRA. Even though it is a retirement plan, the money can be withdrawn for educational purposes without a penalty.

You should get some advice.

Burton