Child with 1099-misc

[Lloyd Hudson]

Small issue that I have not (or remember) encountering. Mother is beautician, rents station. Salon owner enlisted 11year old daughter for chores around salon and then issued her a 1099-misc box 7 for $1200.00. If I create a return for 11-year old without her exemption she owes SE tax. How do I treat it? I have ideas but wanted to see what smart people thought. Without regard to child labor laws 

[Jack from Ohio]

She owes SE tax.

[Lloyd Hudson]

That is what I said. I also suggested that issuer of 1099 change it to box 3 but he was not receptive.  

[Lion EA]

It was for services rendered, so Box 7 and SE tax.  Unless mom wants to risk loss of chair by having daughter file an SS-8 and Form whatever-it-is that says she should be an employee and pay only her half of the FICA/medicare.  Do check your state laws re labor in a salon, probably something like 16.  Might give you some leverage over salon owner to issue a W-2.  But, didn't mom notice that daughter had no withholding?  Didn't mom have daughter turn in a W-4 to salon owner?  Why is mom upset months after the fact, but didn't mind daughter getting money during the year?!  Silver lining is that daughter can start her Roth or Traditional IRA and get a jump start on college saving.

[Yardley CPA]

Lloyd...I'm curious.  Did she issue the 1099 on her own or do you prepare the 1099's for her?  She's a rule follower, for sure.  

[Pacun]

Lion, why will you open a Traditional IRA since this is the perfect example for a ROTH IRA. She should pay the $150 SE tax and open a $1,200 Roth IRA.

Changing it from box 7 to 3 doesn't change the character of the income. Why would you suggest that? No wonder he was reluctant to the suggestion. Remember that they have direct access to the barber and even the barber knows that changing it from box 7 to box 3 doesn't make a difference.

You also said "without her exemption she owes SE tax". She will owe that tax even if she claim herself and her 13 years old brother OR she claims herself and her 9 years old sister, for that matter.

[Lion EA]

I put Roth first, because it would be my preference and what I actually did with my son when a 1099 showed up when he was a teen (we thought it was C-I-T with no money either way, but he got a check and a 1099 at the end of camp, so we immediately opened a Roth).  But, I've had parents insist they want the traditional for their child if it saves the kid only $1.  I don't make the decision; my client does, or their parent if a minor child client.

[Pacun]

Well, in this case a traditional IRA will not save not even a penny...hence my suggestion for a Roth IRA in situations like this.

By the way, do you have a bank that would pay some interest on IRAs?

After I have suggested people have opened IRAS and they make pennies in a year. I wonder if there is a bank that will pay some few dollars without risking the money.

 

[Lion EA]

Risk = Reward.  If you want it safe and in a bank, interest rates are really low right now.

Saving money now is not the only reason to open an IRA.  There's deferring taxes as the money earns interest/dividends and appreciates.  There's starting to save for retirement while young and taking advantage of the compounding of interest.  There's teaching your child about saving for the future.  But, I can't force someone to choose a Roth instead of a Traditional when the Traditional is not going to reduce this year's taxes.  In fact, I had someone chose a Traditional contribution in a year it was not going to save them taxes, because they already had a Traditional and wanted to add to it to enlarge their investment choices instead of starting a Roth with only $2,000 or whatever the limit was in 1998 or so and most mutual funds wanted at least $2,500.  Who was it that posted the horse/water/drink cartoon?  I have a Roth, my son has a Roth, but not all my clients want a Roth.

[jklcpa]

[JohnH]

This conversation has (rightfully & logically) morphed into a discussion about bad tax decisions people make when they rely upon incomplete advice.  There is an interesting irony in the fact that the topic began with a question related to a beautician/hairstylist tax issue.  

[BulldogTom]

8 hours ago, JohnH said:

This conversation has (rightfully & logically) morphed into a discussion about bad tax decisions people make when they rely upon incomplete advice.  There is an interesting irony in the fact that the topic began with a question related to a beautician/hairstylist tax issue.  

The bad choice by the hairstylist was to not "hire" her child (speaking strictly from a federal tax and federal PR tax perspective).  Children under 18 are exempt from Federal PR Taxes.  Had the mother put the kid on Payroll, sent the kid a W2 (which would have taken just slightly longer than producing the 1099), the child would not have SE tax and the mother would not have PR tax expense either.  But the mother would get the deduction for the amount paid, and the child could file a return with no tax liability.

Each State has their own laws about WC and child labor, so I am not going there in this analysis.  The OP would have to look at those implications.

Then the Roth IRA would have been a great choice for the kid to put the money into. 

Tom
Newark, CA

[Gail in Virginia]

35 minutes ago, BulldogTom said:

The bad choice by the hairstylist was to not "hire" her child (speaking strictly from a federal tax and federal PR tax perspective).  Children under 18 are exempt from Federal PR Taxes.  Had the mother put the kid on Payroll, sent the kid a W2 (which would have taken just slightly longer than producing the 1099), the child would not have SE tax and the mother would not have PR tax expense either.  But the mother would get the deduction for the amount paid, and the child could file a return with no tax liability.

Each State has their own laws about WC and child labor, so I am not going there in this analysis.  The OP would have to look at those implications.

Then the Roth IRA would have been a great choice for the kid to put the money into. 

Tom
Newark, CA

Tom, if the mother had been the one hiring the child I would agree with you 100%.  But the way i read the OP, the salon owner that the mother rented her booth from was the one that hired the child.  Only the parent can hire the child without social security and medicare tax.