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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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I should clarify that there was no specific citation of the $2000 being "unearned income" in the letter, but that is the only conclusion that can be reached by the taxable income being increased from $0 to $1,650, and the notice saying that this was due to the Standard Deduction being changed.
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She is a dependent on our return for 2018.
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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.
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(from your second post) I should clarify that there was no specific citation of the $2000 being "unearned income" in the letter, but that is the only conclusion that can be reached by the taxable income being increased from $0 to $1,650, and the notice saying that this was due to the Standard Deduction being changed.

Sorry, you are drawing the wrong conclusion about why the standard deduction was changed. It's not the fact that she had unearned income that reduced the standard deduction. If she's a dependent on your tax return, her deduction is limited to her total earned income plus $350. If they calculated her tax based on $1650 in income, they apparently did consider the $2000 as 'unearned income', but that's not the reason her standard deduction was changed.

Based on what I've read, the IRS is in error here; this shouldn't have been considered unearned income.

Sorry, it's your daughter's error that is causing the IRS to draw incorrect conclusions. They are correct about her standard deduction. And since she should have reported the $2000 on a Schedule C as contracting income, along with any deductible expenses, they are assuming that it's unearned income, instead of earned 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?

There is no 'single side gig' exception. Any net contracting income in excess of $400 will owe self-employment taxes. If she had deductible expenses, she could reduce that income by those expenses to reduce the self-employment taxes owed. If she had at least $1600 in deductible expenses, her contracting income would net out to be less than $400, and she would not owe self-employment taxes.

AJ
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Thanks, AJ. I guess what is throwing me, though, is the 1099 Box 3 use, instead of Box 7 (which I do know would trigger self-employment tax). Most of what I read online says that Box 3 isn't subject to FICA.

Example of what I'm referring to (one among many) here:


https://www.thebalance.com/how-to-report-1099-misc-box-3-pay...
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The W-2s are a total of $6,000. The deduction was reduced to $6,350 which is $350 more than her earned income of $6,000. It doesn't appear that the $2,000 was changed to earned income.

The 2019 standard deduction for a dependent child with earned income is the earned income plus $350. To me, it appears that the IRS is correct.

If she has other unearned income, she might have also hit the kiddie tax limit of $2,100.
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Out of curiosity, I did a test return using 2018 H&R Block software which I used for 2018 tax returns.

With $6,000 in earned income, the standard deduction was $12,000. Adding in $2,000 of unearned income 1099 Box 3 that wasn't subject to self-employment tax, the standard deduction was changed to $6,350.
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I guess what is throwing me, though, is the 1099 Box 3 use, instead of Box 7 (which I do know would trigger self-employment tax). Most of what I read online says that Box 3 isn't subject to FICA.

I guess what's confusing me is the fact that they had her sign an 'independent contractor' agreement. If that's what the intent was, then it seems to me that the income should have been reported in Box 7, not Box 3. That said, since they reported it in Box 3, she would not have to file a Schedule C, since it is considered 'other income'.

In either case, her standard deduction will not be $12,000, but rather, her earned income plus $350. So, she does owe some tax - either the $166 on the $1650 in unearned income, or the self-employment tax on $2000 - which would be $283 if she didn't have any deductible expenses. Since they reported the income in Box 3, I would suggest she accept the $166 tax bill, and take her $84 refund.

In the future, you may want to examine if she's actually providing more than half of her own support (for example, through student loans, scholarships and her part-time income), so she will be able to claim her full standard deduction, rather than you claiming her as a dependent.

One other thing - since she had more than $4150 in gross income, presumably you did not claim the 'other dependent' tax credit for her. If you did claim the 'other dependent' tax credit for her, I would expect that you might be getting your own letter from the IRS.

AJ
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