11 yr daughter with income

[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.

[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]

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]

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