Helping kid file taxes, 1099 MISC

Apparently my kid’s summer internship work was not paid as wages. He received a 1099 MISC form, where the earnings (?) were reported in Box 3. I assume this is something like a stipend?

Is it earned income? If so, he doesn’t need to pay taxes. Total earned is about $2600.

But given that it’s reported on the 1099 MISC form, that would make it unearned, so he would need to pay taxes? No withholdings taken. I think the money was parceled out over 3 checks though, for 6 weeks of work, hence our confusion.

We would like to open a Roth IRA and deposit some of this earned (?) income. Still doable, if technically unearned income? I was reading about the SECURE act, which might address this?

Thanks to anyone who can point me in the right direction. We thought this process would be much simpler!

It’s still taxable income just taxed differently

So unearned vs earned have different thresholds, under which a kid doesn’t pay taxes, correct?

This is taxable income not subject to self-employment tax. Think it’s “Other Income” on Line 21 of 1040.

That is taxable, earned income. Your child was paid as an independent contractor, not employee, meaning to federal income taxes were withheld. Often employers try to do this to save on payroll taxes but it is not ethical unless the job truly fits the definition of contractor.

If he did not earn enough income, he does not have to file (but I am not a CPA, check with your own accountant). How Much Do You Have To Make To File Taxes? | H&R Block

It’s earned income. 1099-INT, 1099-DIV are unearned. 1099-MISC is self employment income. He will have to file a return, pay the self employment taxes which will include his share of social security x2, and medicare. He can also contribute to a Roth or Traditional IRA which any tax program will tell you the amount to contribute. It’s worth it if he has the funds to do so.

He has to file if he earned more than $600 as an independent contractor. I am pretty sure that is still the threshold. Regardless, he made well over that number. For unearned income, the threshold is somewhere like $1,050 in dividend and interest type of income.

I just had this issue with my daughter’s return as well for last summer. It was annoying because there are more forms to prepare than if she had been a w-2 employee.

If this is considered to be a stipend, reported on Form 1099-MISC in box 3 , it’s taxable as “Other Income” and is not self-employment income. Starting in 2021, Self-Employment income is reported on Form 1099-NEC (for Non-Employee Compensation).

Your son is not subject to Self-Employment Tax (Social Security and Medicare). While stipends were not considered to be earned income for contributing to an IRA, in the past, starting in 2020 certain fellowships/stipends are treated as compensation for IRA contributions. Publication 590-A (2019), Contributions to Individual Retirement Arrangements (IRAs) | Internal Revenue Service

This does not sound like a stipend. He said summer internship. Those are not necessarily stipends. A summer internship is most often just a summer job. So he needs to find out the classification and how it’s reported.

Yes he does. It is important, however, to note that this has been reported to the IRS as Other Income, not Nonemployee Compensation as in your daughter’s case. He should not be treated as an Independent Contractor. Note also that student employment is not subject to FICA. So he does need to establish the nature of his stipend/internship/employment with the payor. Student Exception to FICA Tax | Internal Revenue Service(Social%20Security%20and%20Medicare,pursuing%20a%20course%20of%20study.

Ah I missed that he said it was reported in Box 3. That reminds me, my daughter didn’t get her 1099, it was sent to the wrong address. I need to get her to have them send a new one before I do her return.

Fun stuff!

FYI, there’s no Box 7 in 1099-MISC anymore. It’s a whole new form, Form 1099-NEC, and new fun to be had!

My 18 year old has a business and I think he was sent a 1099-NEC. I have pushed all of his tax stuff to the side. His should’ve been the easy return to do, now I’m doing his dead last after my 3 other kids. Factor in that he has to backtrack a lot of expenses, etc. It’s more of a hobby than a business but regardless lots of busywork to come. I should charge him for my time. :slight_smile: Afterall, he already used about 500 of our envelopes, although once those ran out he did go and order his own.

Thanks for the information, everyone. It looks like he will definitely need to find out what the payment is actually classified as. If a stipend, looks like the new rules only apply to graduate students and postdocs, so no IRA this year.

The employer in this case is a contractor that administers and runs a summer internship program for the federal government.

Just to be clear this distinction started for earnings in 2020 (see Instructions for  Forms 1099-MISC  and 1099-NEC (2020) | Internal Revenue Service). So anything reported on a 1099-MISC is not going to be classified as Non-Employee Compensation for tax purposes unless the employer made a mistake.

However, note also the statement in these instructions about taxable scholarships, which appears to complicate matters further:

Do not use Form 1099-MISC to report scholarship or fellowship grants. Scholarship or fellowship grants that are taxable to the recipient because they are paid for teaching, research, or other services as a condition for receiving the grant are considered wages and must be reported on Form W-2. Other taxable scholarship or fellowship payments (to a degree or nondegree candidate) do not have to be reported to the IRS on any form, unless section 6050S requires reporting of such amounts by an educational institution on Form 1098-T, Tuition Statement.

It would seem that this may be a payment for “incidental expenses” (see Topic No. 421 Scholarships, Fellowship Grants, and Other Grants | Internal Revenue Service) but it is unclear whether this should be reported at all on a 1099-MISC?

My son had an internship and was paid a stipend. They would not give any tax advice (This was 2017). We paid taxes, but not everyone in his program did. Part of the reason we did was we knew he might have to apply for a security clearance when he graduated, and wanted to make sure there were no issues.

Yes, that’s it exactly. Fellowships and stipends aren’t supposed to be reported on a 1099-MISC, but often are. They are usually still taxable and should be reported as income even though there is no form. It’s up to the recipient to ascertain the nature of the payments. I doubt that this was for “incidental expenses” but who knows?

So my kid tells me that during orientation for the program it was specifically called a stipend.

Is there any way to justify a contribution to a Roth IRA, given how this was reported?

I’m assuming he will pay taxes, not FICA, but hesitate to ask anymore questions until he and I actually sit down with a 1040 and fill in some blanks. I’m almost afraid to approach this through Turbo Tax.

I am pretty sure you can’t contribute to a ROTH IRA based on these funds. My son thought he could, and he made a big (for him) $ mistake tax-wise, which cost him a couple thousand extra bucks in taxes.

Yep, he opted to not open a Roth IRA. It’s a shame, and this summer he’s being paid by stipend too. If work study pay is W2 earnings he may be able to open an account this year.