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My daughter filed her 2018 1040 by snail mail this year. Her normally simple (and Free-File) taxes were complicated this year by a 1099, so she opted for old-fashioned paper rather than fork over the $50 (or whatever it was) that TaxAct wanted to file with a side-gig 1099. She's a full-time student with two years of graduate school looming, so I applaud her frugality.

She had two W-2's totaling about $6000. Her 1099 was from a research lab where she had been offered a volunteer position a few days a week in a field that interested her and was relevant to her grad school plans. She proved so valuable to the Professor who headed the lab that he arranged for her to received a $2000 "Independent Contractor" (language from the paperwork she filled out) payment at the end of the summer. That payment arrived as a gross check, and was reported in Box 3 of a 1099-MISC at the end of the year.

She had no other income besides the two W-2's and the 1099. She is a dependent on our return for 2018. She believed she would receive a full refund of the $250 tax she had withheld from her two part-time jobs.

When she filled out her tax form, she included the $2000 on Schedule 1, Line 21, listed as "XXX University Research Award".

Apparently she shouldn't have used the word "Award", because she just received a letter from the IRS indicating that the $2000 was "unearned income", and as such, her Standard Deduction was being reduced from $12,000 to $6350 (her income plus $350), so she now owes tax of $166 on the remaining $1650.

Based on what I've read, the IRS is in error here; this shouldn't have been considered unearned income. BUT, if she is able to contest this by explaining the situation (and providing a copy of the Independent Contractor Agreement), will she then owe self-employment tax on the amount, or because it's just a single side gig, will she be not subject to that?

Thanks for any guidance.
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