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Tax Question--1099 MISC Box 3, Other Income, Summer Research Stipend

CT1417CT1417 4436 replies24 threads Senior Member
My college Jr. was paid $4400 for a summer research stipend. He also earned $1200 as a TA during the school year. He received a 1099-MISC with $4400 reported as Other Income in box 3, and a W-2 for the $1200 paid weekly by payroll. No taxes were withheld from the lump sum stipend or his weekly pay checks. I cannot remember where I read it, but apparently universities do not need to pay or collect and remit FICA on behalf of student hires, which explains why his TA W-2 earnings did not have anything withheld. I understand why he does not owe Fed taxes on the $1200 in W-2 earnings.

I have gone around in circles reading TurboTax 'solutions' and old threads here on CC, but I am still not certain that I understand this, or that TT has calculated correctly.

My first run through resulted in SE tax. I deleted the 1099-MISC entry, re-entered all of the figures but perhaps with more accurate responses, resulting in a tax liability of $405 instead of the $620+ that was produced by the SE tax calculation.

Based on the Tax Summary worksheet, it appears that TT has calculated his standard deduction as the sum of his W-2 income & the $350 exemption of the kiddie tax calculation, so $4400 - $350 = $4050 of 'taxable earnings'. This appears to be a flat 10% tax, but I thought the Trusts & Estate rates were 10% of 1st $2600, and then 24% of the balance of $1450, or $608 total.

I read this thread, but it discusses box 7 instead of box 3.

https://talk.collegeconfidential.com/financial-aid-scholarships/2067217-tax-question-1099-misc-box-7-for-a-dependent-child-summer-research-stipend-p2.html

Someone on the TT Solutions page suggested a workaround that requires one to enter the stipend amount as negative under Other Income, but that seems suspect.

Any thoughts or idea why TT has calculated the tax liability as 10% of the stipend amount less the $350 exemption? As many others posted on the older thread, if this money had been reported as W-2 income, no tax would be due. I want to understand and do what is correct.

Thanks!
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Replies to: Tax Question--1099 MISC Box 3, Other Income, Summer Research Stipend

  • thumper1thumper1 76595 replies3392 threads Senior Member
    edited February 14
    @BelknapPoint can tell if I am not correct.

    I am not a tax professional or expert...but...I believe....

    Your child earned $4000 in 1099 income. I believe the threshold for 1099 income to be reported is $400 for the year.

    I don’t believe you can just omit this from your kid’s tax return. If he earned this money, he indeed owes self employment tax which he must pay.

    He did not earn w-2 income which has a different threshold.
    edited February 14
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  • CT1417CT1417 4436 replies24 threads Senior Member
    Thanks @thumper1.

    I truly do not know.

    I am still trying to figure out if he needs to file a return. (IRS Topic #553):

    "Use Form 8615, Tax for Certain Children Who Have Unearned Income (PDF) to figure your tax on unearned income over $2,200 if you're under age 18, and in certain situations if you're older (see below). Attach Form 8615 to your tax return if all of the following conditions are met.

    Your unearned income was more than $2,200.
    You meet one of the following age requirements:
    a. You were under age 18 at the end of the tax year,
    b. You were age 18 at the end of the tax year and you didn't have earned income that was more than half of your support, or
    c. You were a full-time student at least age 19 and under age 24 at the end of the tax year and you didn't have earned income that was more than half of your support.
    At least one of your parents was alive at the end of the tax year.
    You're required to file a tax return for the tax year.
    You don't file a joint return for the tax year."

    Was also reading IRS Publication 970, pg 5:

    "A scholarship or fellowship grant is tax free only to the extent:
    --It doesn't represent payment for teaching, research, or other services required as a condition for receiving the scholarship."

    It's a stipend and not a scholarship, but the payment was for research, so that seems to suggest it is taxable.

    "If all or part of your scholarship or fellowship grant is taxable and you are required to file a tax return, report the taxable amount as explained below. You must report the taxable amount whether or not you re- ceived a Form W-2. If you receive an incorrect Form W-2, ask the payer for a corrected one."

    It was a 1099 and not a W-2, which would have eliminated all this confusion.

    "If you file Form 1040 or 1040-SR, include the taxable amount in the total on line 1. If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 1."

    If I do as suggested above, I think that would eliminate his tax liability but I have NO idea if that is how this should be handled. Clearly, TT does not think so, and he has a 1099, not a W-2.

    Thanks for trying to help.
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  • BelknapPointBelknapPoint 4785 replies18 threads Senior Member
    Based on the Tax Summary worksheet, it appears that TT has calculated his standard deduction as the sum of his W-2 income & the $350 exemption of the kiddie tax calculation, so $4400 - $350 = $4050 of 'taxable earnings'. This appears to be a flat 10% tax, but I thought the Trusts & Estate rates were 10% of 1st $2600, and then 24% of the balance of $1450, or $608 total.

    Why would the $4,400 in compensation for the summer research be taxed as unearned income under the kiddie tax rules and taxed at trusts and estates rates? Is TT completing form 8615? The $4,400 is clearly earned income ("Earned income includes wages, tips, and other payments received for personal services performed.")
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  • CT1417CT1417 4436 replies24 threads Senior Member
    edited February 15
    @BelknapPoint

    TT is attempting to fill form 8615, but the form will not be ready until the end of Feb. (Perhaps due to the changes of the Secure Act, giving filers the choice of using Estate rates and parents' rates?).

    The form has DO NOT FILE written on it in red, and when you exit back to the interview section, there is a note about the delayed availability.

    To answer your other question, I have NO IDEA why TT wants to tax this at the kiddie tax rate, but I also don't know if it should be subject to SE taxes (the 15.3% FICA) either.

    Do you have any idea what TT is doing in calculating a 10% tax on the $4050 determined to be taxable?

    The only piece I understand is that the W-2 earnings are not being taxed. The rest is a mystery.
    edited February 15
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  • twoinanddonetwoinanddone 23865 replies17 threads Senior Member
    Did you enter it as a scholarship?
    Use Form 8615, Tax for Certain Children Who Have Unearned Income

    This is not unearned income. The W-2 income is, well, income. It's not being taxed because (child's) income is under the $12,200 standard deduction. Even adding the 1099 income (which is still earned income) there should be no tax.

    Unless you can find an exception, there should be SE tax on the 1099 income. I don't think the kiddie tax should come into it at all.

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  • mommdcmommdc 11786 replies31 threads Senior Member
    I assume since he didn't earn a salary for the research job, that the stipend is supposed to help with housing costs.

    I found this:

    https://ttlc.intuit.com/community/college-education/discussion/undergraduate-summer-educational-research-stipend-reported-on-1099-misc-box-3/00/197696
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  • CT1417CT1417 4436 replies24 threads Senior Member
    @mommdc -- Thanks! Yes, the stipend was intended to cover housing & food as there was no other 'pay'.

    Thanks for the link. That was one of the conflicting TT help questions I read last night. (I read dozens, and that one responder Carl appears in many.) If this is correct, I could file his taxes manually because for now, TT has calculated a tax liability of $405.

    I entered it under '1099 MISC and Other Common Income'. The TT interview prompts me to enter the university name, amount in box 3, etc, and then goes on to ask other questions about the source of the earnings. Research never comes up as an option, but instead the options are farm rental income, prize winnings, lawsuit, tribal gaming, or none of the above.

    I am not convinced this is correct.

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  • CT1417CT1417 4436 replies24 threads Senior Member
    @twoinanddone -- No, I did not enter it as a scholarship. I haven't yet bothered to enter the 1098-T and 1099-Q info as I wanted to make sure I had his income tax correct before I cloud the picture. (No scholarship, no financial aid, so it should not be a problem.)

    I understand why his W-2 income is not being taxed as that amount is well below the standard exemption threshold. As I commented earlier, for some off reason, universities are not required to withhold FICA or pay their share of FICA on behalf of employees (at least the students ones), so his net pay equals his gross pay every week.

    In light of that fact, I cannot imagine the university intended to have the students pay 15.3% of their stipend for FICA, when no FICA would have been owed if they had been paid as W-2. They were not hourly employees, but were expected in the office 40 hours/week. However, no one punched a clock and things seemed fairly flexible.

    The school paid for him to travel to an undergrad research conference (flights, hotel, & meals), but the value of that trip was not reported anywhere. I have no idea if that details is of any relevance.

    I agree with you that it doesn't seem as though the kiddie tax should come in to play here, but I cannot figure out what the 10% tax on $4050 ($4400 less $350 kiddie tax exemption) is otherwise.

    Thanks for your help!
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  • thermomthermom 479 replies9 threads Member
    @CT1417 Thank you for posting this thread, as I'm dealing with the same exact issue regarding the summer research stipend my D got this summer - TurboTax is coming up with her owing what looks like a crazy amount of tax due for what was supposed to just be a stipend to cover her food and housing over the time she stayed over the summer.
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  • CT1417CT1417 4436 replies24 threads Senior Member
    @thermom --- Well...I haven't really concluded anything yet!

    Do you know how TT is characterizing her earnings? Does it appear that she is being taxed for self-employment or for kiddie tax?

    Did she receive a 1099-MISC from her school, and if so, were her earnings reported in box 3 or 7? (I am not sure what the difference is, but just trying to identify the different reporting scenarios.)

    Does she also have W-2 earnings from her school for anything? Just curious if all colleges do not withhold FICA from W-2 earnings.
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  • thermomthermom 479 replies9 threads Member
    edited February 15
    @CT1417 Not sure if this applies to your S's situation exactly, but in the further reading I've just been doing, including the IRS docs/worksheet (Publication 929) it looks like my D won't have to file anything at all this year - the research stipend she got was box 7, she also got a separate award during the year which was in box 3 - put together they came to $3650 which counts as earned income. She also had W2 income of about $800 from her school year tutoring work. This all counts as earned income so far as I can tell, and the threshold for having to file as a dependent is earned income of $12000 (for single person under 65, not blind)

    I'm not sure what the heck TT was figuring, actually, but according to the IRS, both current regs and draft regs from 12/19, my D should not have to file anything at all this year, as she had no unearned income and her earned income falls well below the threshold.
    edited February 15
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  • CT1417CT1417 4436 replies24 threads Senior Member
    @thermom -- Thanks!

    There does seem to be one school of thought that a person does not need to file if below a certain income threshold, however, I am still wary and still uncertain about the earned vs unearned characterization.

    I have had this very old thread open for a while, which talks about the existence of the 1099-MISC serving as a flag to look for the tax return. Many comments about box 7 vs box 3 on that thread. Clearly this confusion has existed for years.

    https://talk.collegeconfidential.com/financial-aid-scholarships/1623368-2013-nsf-reu-stipend-reported-on-a-1099-misc-in-box-7-independent-conractor-p2.html
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  • thermomthermom 479 replies9 threads Member
    edited February 15
    @CT1417 Everything I've read seems to indicate that unearned really only talks about things like interest, dividends, etc. whereas a stipend would seem to be more akin in type/kind to a scholarship or fellowship.

    Per the IRS definition in Pub 929 for unearned income: "This is investment-type income and includes interest, dividends, and capital gains (including capital gain distributions)rents, royalties, etc. Distributions of interest, dividends, capital gains, and other unearned income from a trust are also unearned income to a beneficiary of the trust."

    Vs. the definition of earned income which includes: "For purposes of determining a de- pendent's standard deduction, earned income also includes any part of a scholarship or fellowship grant that the dependent must include in his or her gross income."
    edited February 15
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  • mommdcmommdc 11786 replies31 threads Senior Member
    If you treat the stipend (he was doing research at a university but wasn't paid W2 wages and got the stipend to help pay living expenses) as a taxable scholarship, then it is treated as earned income for purpose of determining standard deduction and unearned income for purpose of figuring kiddie tax.

    You need to decide if you want to treat it as taxable scholarship or 1099 misc self employment income. If kiddie tax comes into play, either way he will owe some tax.

    And if it is treated as self employment income or it is 1099 misc box 7 income, then self employment tax will be owed.

    Self employment income of over $400 I think requires a tax return to be filed and self employment tax to be paid.

    If the IRS gets that 1099 misc they might be looking for a tax return, they might contact him later about it.
    But if you can make the case that this was not wages income but a stipend solely for housing and food, then maybe you can justify reporting it as a taxable scholarship.
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  • BelknapPointBelknapPoint 4785 replies18 threads Senior Member
    TT is attempting to fill form 8615, but the form will not be ready until the end of Feb. (Perhaps due to the changes of the Secure Act, giving filers the choice of using Estate rates and parents' rates?).

    The form has DO NOT FILE written on it in red, and when you exit back to the interview section, there is a note about the delayed availability.

    The IRS has updated form 8615 for tax year 2019 and made it available for use, so this is just TT being slow in updating their software.

    To answer your other question, I have NO IDEA why TT wants to tax this at the kiddie tax rate, but I also don't know if it should be subject to SE taxes (the 15.3% FICA) either.

    Do you have any idea what TT is doing in calculating a 10% tax on the $4050 determined to be taxable?

    I don't know why the 1099-MISC earnings would trigger the kiddie tax, but if it's taxable income the first tax bracket for either the regular single category or estates and trusts is at the 10% rate. For income that is subject to the kiddie tax, the first $1,100 is not taxed, the next $1,100 is taxed at the child's normal tax rate, and only above $2,200 are the estates and trusts brackets and rates used (or if the taxpayer chooses, the highest marginal rate of the parent(s)).

    If the amount reported on the 1099-MISC is a housing stipend and is supposed to be reported as a scholarship, that would be considered earned income for the purpose of determing the standard deduction, and everything would be covered under the standard deduction of $12,200.

    In light of that fact, I cannot imagine the university intended to have the students pay 15.3% of their stipend for FICA, when no FICA would have been owed if they had been paid as W-2.

    If there is self-employment tax owed, half of that 15.3% will come back as an above-the-line-deduction.

    Does she also have W-2 earnings from her school for anything? Just curious if all colleges do not withhold FICA from W-2 earnings.

    Section 3121(b)(10) of the Internal Revenue Code (the "Code") allows an exemption from U.S. social security (FICA) and Medicare tax on wages for services performed in the employ of a school, college, or university by "a student who is enrolled and regularly attending classes" at the institution.

    https://corporate.findlaw.com/litigation-disputes/irs-issues-new-rules-on-student-fica-exemption.html
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  • CT1417CT1417 4436 replies24 threads Senior Member
    Thanks for persevering with me @mommdc!

    If you can bear it...I am still a bit confused.

    "If you treat the stipend (he was doing research at a university but wasn't paid W2 wages and got the stipend to help pay living expenses) as a taxable scholarship, then it is treated as earned income for purpose of determining standard deduction and unearned income for purpose of figuring kiddie tax."

    The same compensation is treated as both earned & unearned income? Does that mean the kiddie tax would come into play? If so, that may explain what TT has done, although I still don't understand why the tax bill is $405 on a $4050 taxable earnings (or non-earnings).

    Are taxable scholarships considered both earned and unearned income???

    His stipend was reported in box 3 instead of box 7. I do not know the distinction, but parents on the old 2014 CC thread were trying to have stipends restated as box 3.
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  • BelknapPointBelknapPoint 4785 replies18 threads Senior Member
    edited February 15
    The same compensation is treated as both earned & unearned income? Does that mean the kiddie tax would come into play? If so, that may explain what TT has done, although I still don't understand why the tax bill is $405 on a $4050 taxable earnings (or non-earnings).

    Are taxable scholarships considered both earned and unearned income???

    Yes!! Isn't the IRS wonderful?

    For purposes of determing the standard deduction for a dependent, taxable scholarships are considered to be earned income, which is a good thing. See the footnote at the bottom of the Standard Deduction Worksheet for Dependents on page 30 of the 1040 instructions.

    https://www.irs.gov/pub/irs-pdf/i1040gi.pdf

    In determing whether or not the kiddie tax applies (form 8615), taxable scholarships not reported on a W-2 are considered to be unearned income. See page 1 of the instructions for form 8615.

    https://www.irs.gov/pub/irs-pdf/i8615.pdf

    If the research stipend is a taxable scholarship, and given the numbers you have provided, the kiddie tax would never come into play, because all the amounts reported on the W-2 and 1099-MISC would be covered by your son's standard deduction.
    edited February 15
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  • twoinanddonetwoinanddone 23865 replies17 threads Senior Member
    Are taxable scholarships considered both earned and unearned income???

    Yes, through the magical reasoning of the IRS. It is earned income ONLY for the purpose of determining the standard deduction and unearned income when it comes to paying the taxes.

    The standard deduction is pretty much 'up to $12,200' this year so any amounts, earned or unearned up to that amount will not have income tax due. SE might be due.

    One reason to file even if you don't have to by regulation (no taxes due) is that you can use the DRT to file FAFSA the following year.
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  • BelknapPointBelknapPoint 4785 replies18 threads Senior Member
    The standard deduction is pretty much 'up to $12,200' this year so any amounts, earned or unearned up to that amount will not have income tax due.

    That's not necessarily true. A taxpayer who can be claimed as a dependent on someone else's tax return and who has $1,000 in wage income and $1,000 in interest and dividend income would have a standard deduction of $1,350 and would therefore pay tax on $650 of income.
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  • mommdcmommdc 11786 replies31 threads Senior Member
    I have never dealt with this but it seems that form 1099 misc box 3 (other income) has the potential to be treated differently than box 7 (self employment income).

    Yes, the earned/unearned dilemma when it comes to taxable scholarships and kiddie tax is confusing.

    You can look form 8615 up on the internet.

    I don't know why the calculation is the way it is.
    Did you do a preview of the tax return and see what forms are generated?
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