Never seen this one

[ChrisCPA]

My clients child (4 year old) received a 1099-misc from a company trust fund for directors fees. Apparently the uncle of this child was on a board of directors who setup a retirement fund for the directors. In this case the uncle died and this child was the beneficiary of this retirement fund. The company claims that this is a director fee paid to the child.

I have never seen this before. I am assuming this is subject to SE tax for a 4 year old?

[Koss]

Four year old

That's absurd. That hasn't been accurately reported.

Which box was used on the Form 1099-MISC? Box 7 or Box 3?

If it's reported in Box 3, I would simply put it on line 21 and be done with it.

If it's reported in Box 7, I would escalate the issue through the office of the treasurer of the company. They can't pay a four year old director's fees. If it's retirement plan that belonged to the uncle, it probably belongs on a 1099-R with Code 4 (Death).

Or else report it on line 16 as a retirement plan distribution, and attach an explanation.

How much money is involved here? And how long will this continue?

[ChrisCPA]

Does seem absurd. The amount is $4068 per year and will go on for eight years. It is reported in box 7 of form 1099-misc. The client called the company secretary who said this was the correct reporting. I just don't see it and maybe I should call the company.

[ChEAr$]

one question:

Does seem absurd. The amount is $4068 per year and will go on for eight years. It is reported in box 7 of form 1099-misc. The client called the company secretary who said this was the correct reporting. I just don't see it and maybe I should call the company.

Did the child actually get the money?

At any rate, it is NOT SE income, since a four year old child is not capable of indulging/
engaging in business activities. And probably prohibited by state law from doing so.
But I'm not a lawyer.

[gkaiseril]

Open an IRA and ESA

Open a traditional IRA and ESA funded from the child's earnings. Not only will this provide for college but will also keep the investment earnings tax free and not subject to the parent's rate. The downside is that the SE tax is due and that is more tax than is legally due.

I would report as a pension payment and attach a letter to the return explaining to the IRS the facts of the situation and why you think this is the wrong treatment. You also might send a copy of the letter to the corporation's legal console so that individual is aware of the problem their handling of this payment is causing.

[Koss]

Inaccurate reporting

I had a similar, but analogous problem a few weeks ago.

The city removed trees from client's property in order to perform sewer work, paid the client for the trees, and reported it in Box 7 on Form 1099-MISC.

My conversation with the city's accounting staff was ridiculous:

B: You're not following the instructions for Form 1099. I can send you copy if you'd like.

C: I have the instructions.

B: Well, it says that if the income isn't subject to self-employment tax, it should be reported in Box 3, not Box 7.

C: We've been doing it this way for years, and the IRS is in here every year and never has a problem with it.

B: Are you conceding that Mr. xxx did not perform any services for the city?

C: Yes.

B: So is the income subject to self-employment tax?

C: I don't know.

B: I don't think you can accurately complete this form without determining that.

She ultimately encouraged me to escalate the matter to the city auditor.