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She is a dependent on our return for 2018.
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.
(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.

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