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Subject:  Re: Self employment tax Date:  6/23/2006  10:50 AM
Author:  ptheland Number:  87533 of 127611

Without a doubt by issuing a 1099, her BIL is going to take a tax deduction or credit for what he pays your wife.

Agreed. The BIL's motivation is almost certainly to take the child care credit.

(whether it should be a [W-2] or not is immaterial)

I disagree. It makes a tremendous difference to the OP.

If it should be a W-2, the OP would be an employee. FICA taxes would be due on the gross pay, and the expenses she incurs may not provide a tax benefit.

If she's not an employee, the FICA taxes are going to be less. At a minimum, the expenses will reduce the FICA taxable income. And if it's a hobby, no FICA taxes are due at all.

That's taxable income to you.

Again we agree. The income is taxable.

IF he issues the 1099, your move is to file it on Schedule C as a business, not a hobby. A hobby is something the IRS forces on you when you lose money at a business, not something you voluntarily do if you sell something or perform a service. Since when is baby sitting a hobby?

Back to disagreement.

A trade or business is an activity in which you expect to make a profit. You might not actually do so, but you carry on the activity with a genuine expectation of making a profit. A hobby is an activity that is entered into without an expectation of profit.

Hobby and business are two mutually exclusive things. An activity is a business, or it is a hobby. (At least for tax purposes.) If you lose money at a business, you claim your losses. If you lose money at a hobby, it's not deductible.

And it can make sense to claim an activity is a hobby, as it removes FICA taxation from the picture. FICA taxes are due only on the net income from a trade or business, not on hobby income.

Anyway your wife is in the child care business and can write off more than she makes

I'm going to disagree again.

It sounds like there is no expectation of a profit. The OP isn't looking for more kids to care for, isn't seeking the necessary licenses for a business or a day care center, and isn't expecting the payments from the children she is caring for to cover her expenses. That screams "hobby" to me.

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