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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.

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