Tax help for self employed 16 yr old

[Stressy]

My son is a sports official. Local Little League umpire and a Soccer Referee.

He basically gets paid "under the table" He is and will continue making his ranks up the Soccer referee ladder. He has "graduated" from the local soccer league to "Club" soccer, tournaments, State cup-stuff like that. He has joined an official association. No one has ever asked for his social security number. Mostly he is paid cash on the field...though sometimes it's a check for tournaments through the association.

He recently started refereeing for Middle Schools in the area. He was asked to complete a W-9. Poor kid-had no clue. He has never worked a "real" job with a W-4 or witholding. Apparently what he is doing should be classified as self-employed or an independent contractor.

I have never been self employed-but I have started to research whether he will need to file taxes.

Best I understand, he may (or may not) receive a 1099 if his income from one source is less than 600.00...this could be unlikely-given he will referee for several schools and each will view him individually. However, I also read that if you have 400.00 net income-then you should file taxes. One of the adult referees told him when he gets close the 600.00 limit then he stops refereeing for that particular school.

So, if anyone can help, I have several questions.

1. If he receives a 1099 in any amount-then should he file taxes? Or should he wait until all his 1099's total 400.00? Will the schools report it if it's under 600.00? (I realize this is probably a question for the individual school)

2. If he files, then should he be able to deduct uniforms, licensing fees, association fees, mileage...what about meals? Receipts will be kept of course.

3. Should he include all income? The money he makes without a W-9? I will probably ask the adult referees how they handle it as well.

I know that eventually in life this will become something he reports in addition to his regular income...as he plans to do it through college and most likely beyond....but it's just difficult to explain to him why his first tax return will NOT be a 1040EZ...

 

[kewanee]

1. If he receives a 1099 in any amount-then should he file taxes? Or should he wait until all his 1099's total 400.00? Will the schools report it if it's under 600.00?

If he gets a 1099, then yes he will need to file. All 1099's are also sent to the govt. My company does not issue 1099's for contractors that are less than $600, so my guess is that the schools also will not.

I'm not going to attempt answers on the other questions - I know there
are more experienced people on this board than me!

 

[Talent312]

Whether or not he even needs file a return at all is the threshold question.
If he may be claimed as a dependent of someone else (a parent), he has a special status.

From IRS Publication 501, Table 2 (2008):*
If your parent (or someone else) can claim you as a dependent, use this table to see if you must file a return.

You must file a return if any of the following apply:
... Your unearned income was more than $900.
... Your earned income was more than $5,450.
... Your gross income was more than the larger of —
(a) $900, or (b) Your earned income (up to $5,150) plus $300.

[*Amounts for married persons and persons over 65 or blind omitted.]

If he needs to file a return, he must report income that is reported to the IRS on a 1099. "Under the table" payments should be reported, but frankly, there are many who don't as the IRS would not otherwise know about it. Lemme say here that one of my tenants regularly pays rent in cash, but I report the full amount becuz otherwise my Schedule E would be out of whack... and it happens to be the right thing to do.

He would report his income on Schedule C, where his expenses would also be deducted. He'll also need to file a Schedule SE (Social Security Tax). If he wants to claim car travel, he needs to be keep a contemporary mileage log. Even if he has taxable income, the new stimulus bill contains a $400 individual tax credit that can be applied to reduce his tax liability for this year and next.

You look at / print Publication 501, the schedules and their instructions at www.irs.gov. It'll give him a checklist of what records he needs to be keeping.

 

[Dave M]

Talent's posted quote is correct. Your son's income qualifies as earned income, because he performed services (just as an employee would) to earn that income. What that means is that he doesn't need to file unless (1) his earned income (income less deductible expenses) is more than $5,400 or (2) his deductible expenses exceed $300 and his total earned income before expenses exceeds $900.

However, please keep in mind that whether or not he receives a 1099 makes no difference in whether he needs to file. Clarifying info in an earlier post, he does not need to file merely because he receives one or more 1099s. He is responsible for keeping track of all payments he receives. They all count as income.

When and if he reaches the above threshold where he needs to file, he must include all income on his return. He can choose to cheat (or you can suggest that he cheat) by omitting some income, but the penalties for doing so if he is caught are steep (including possible jail time for the responsible person) and it would be a poor example to set for a 16-year-old.

You might hear from someone that if your son's income needs to be reported to IRS, you can elect to include your son's income on your own return instead of having him file. That option is available in some circumstances, but not in your son's situation.

Here is a direct link to Publication 501.

 

[wackymother]

I'm self-employed, and I was going to say something along the lines of what Dave said. If I earn less than $600 from a single client, then my client does not need to give me a 1099. But I still have to report that income to the IRS and pay taxes on it.

In your son's case, it seems unlikely that the IRS would come after him...but it could happen.

However, when it is time for your son to apply to colleges, playing fast and loose with his tax returns is definitely a gray area that could get him in trouble. It's really easier just to do everything according to the letter of the law.

 

[Talent312]

... In your son's case, it seems unlikely that the IRS would come after him... but it could happen.... when it is time for your son to apply to colleges, playing fast and loose with his tax returns is definitely a gray area that could get him in trouble. It's really easier just to do everything according to the letter of the law.

Of course, reporting "off the books" income is the right thing to do. But lets be realistic here. By all accounts, IRS's effort to interdict the underground or cash economy is laughable. In L.A., there are public platforms where day laborers are being told to take their payments in cash, not checks, becuz the checks will be bad and enable ICE to find them. Even when IRS is told that someone is being paid "off the books," they'll say, "We look into in a few years." Its estimated that the underground market amounts to 10-13% of GDP.

 

[wackymother]

Yes, it's unlikely...very, very, very unlikely that the IRS will come after the kid. But, Talent, the whole FAFSA/college application process is squirm-inducing in the extreme. Technically, a college that has accepted a kid can rescind an acceptance for an honor-code violation. I've never heard of it actually happening, but it makes me anxious just thinking about it for my kids!

 

[Talent312]

Granted... any believer in "the rules of the game," as this kid seems to be, would be expected to toe-the-line. BTW, included in his income would be any receipts from other activities, such as babysitting, lawn-care or any allowance paid for chores performed.

 

[Stressy]

Talent's posted quote is correct. Your son's income qualifies as earned income, because he performed services (just as an employee would) to earn that income. What that means is that he doesn't need to file unless (1) his earned income (income less deductible expenses) is more than $5,400 or (2) his deductible expenses exceed $300 and his total earned income before expenses exceeds $900.

Here is a direct link to Publication 501.

Thank you all for your responses.

Can I get clarification on the point quoted above? I don't understand the difference. He "could" have 300.00 in expenses easily if we add up everything for the year and that means his income after expenses would exceed 900.00 BUT I don't believe he will make over 5400.00 during the entire year. He might-but this is obviously seasonal employment not every week.

If he doesn't claim expenses then does it revert to the 5450.00 amount? In which case the 1099's won't matter if his income does not exceed 5450.00?

Also-say he was working at the local burger place and he did have witholding-then he WOULD want to file regardless of the amount of annual income to receive any potential refund. Correct? (seperate question...assuming no independent contractor employment)

Talent,

I had to chuckle over the believer in "the rules of the game" comment. That is just spot on who my son is.....in life and on the field.

 

[Talent312]

... say he was working at the local burger place and he did have witholding-then he WOULD want to file regardless of the amount of annual income to receive any potential refund. Correct?

You are correct. My stepson works PT for near min. wage and each year he files to recover his withholding. Its also a good idea in case the government offers another rebate.
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Off-Topic: Officiating is a great way to build character. But I hope he learns that sometimes in real life, the application of "rules" is not always black+white, but sometimes requires a measured response and judgment. I know of a trooper who issued five tickets to a young woman and later went to the prosecutor to ask him to dismiss four, saying that he had learned some things that led him to believe he had been too tuff on her. I was quite surprised.

 

[Icarus]

There was nothing useful here, so I deleted my own post.

-David

 

[Dave M]

Thank you all for your responses.

Can I get clarification on the point quoted above? I don't understand the difference. He "could" have 300.00 in expenses easily if we add up everything for the year and that means his income after expenses would exceed 900.00

With those facts, he would have to file. I tried to reword the quoted IRS language in my earlier post to make it clear, but apparently I didn't do it very well.

Take a careful look at the two parts of this phrase:

You must file a return if ... Your gross income was more than the larger of — (a) $900, or (b) Your earned income (up to $5,150) plus $300.

(a) It sounds as though he will have more than $900.

(b) Since expenses will exceed $300, he will also have gross income greater than "earned income plus $300."

Thus, since he exceeds both limits, he will need to file.

So why is that $5,150 included in that phrase? Because without it, one could have much more gross income, claim a lot of deductible expenses and avoid filing a tax return! The purpose of the $300 expense limitation is to require most people who claim deductible expenses to file a return. That's because one of the biggest area of fraud is claiming unallowable expenses.

 

[isisdave]

DaveM,

Wouldn't he have to file a 1040 and Schedule SE if he has more than $400 in (net) self-employment income, regardless of the amount of earned or unearned income, if only to pay the Social Security self-employment taxes? http://www.ssa.gov/pubs/10022.html

 

[Stressy]

You are correct. My stepson works PT for near min. wage and each year he files to recover his withholding. Its also a good idea in case the government offers another rebate.
-----
Off-Topic: Officiating is a great way to build character. But I hope he learns that sometimes in real life, the application of "rules" is not always black+white, but sometimes requires a measured response and judgment. I know of a trooper who issued five tickets to a young woman and later went to the prosecutor to ask him to dismiss four, saying that he had learned some things that led him to believe he had been too tuff on her. I was quite surprised.

Exactly! We work on the color "gray" with him every day. The boy was just hard wired this way..I think more life experience will help.

 

[Stressy]

With those facts, he would have to file. I tried to reword the quoted IRS language in my earlier post to make it clear, but apparently I didn't do it very well.

Take a careful look at the two parts of this phrase:

You must file a return if ... Your gross income was more than the larger of — (a) $900, or (b) Your earned income (up to $5,150) plus $300.

(a) It sounds as though he will have more than $900.

(b) Since expenses will exceed $300, he will also have gross income greater than "earned income plus $300."

Thus, since he exceeds both limits, he will need to file.

So why is that $5,150 included in that phrase? Because without it, one could have much more gross income, claim a lot of deductible expenses and avoid filing a tax return! The purpose of the $300 expense limitation is to require most people who claim deductible expenses to file a return. That's because one of the biggest area of fraud is claiming unallowable expenses.

5150 was obviously included to indicate how loony I would become trying to understand....:rofl:

Ohhhh. OK-I have just read it several more times. I need to ignore the 5150 and just go with earned income (whatever that is) plus 300.00 (expenses)

SO-let me see if I understand this correctly. Let's ignore expenses and not deduct them-He will absolutely make more than 900.00..but NOT more than 5150.00...if we ignore expenses then can he then wait until he hits 5150.00 plus 300.00...5450.00?

Keep hitting me over the head-I'll get it eventually....and I really appreciate the time spent with me.

 

[Talent312]

Wouldn't he have to file a 1040 and Schedule SE if he has more than $400 in (net) self-employment income, regardless of the amount of earned or unearned income, if only to pay the Social Security self-employment taxes?

Ummmm, I believe this poster is correct...
Table 3 from Publication 501 pertaining to "Other Situations When You Must File a 2008 Return" does say: "3. You had net earnings from self-employment of at least $400."

One caveat: Everything said here pertains to the state of the tax code in 2008 and a lot of tinkering is going on this year. The 2009 version of Pub. 501 will need to be closely examanined.

 

[cpamomma]

DaveM,

Wouldn't he have to file a 1040 and Schedule SE if he has more than $400 in (net) self-employment income, regardless of the amount of earned or unearned income, if only to pay the Social Security self-employment taxes? http://www.ssa.gov/pubs/10022.html

This is correct. He may have self-employment taxes due even though he may not be responsible for paying any income taxes.