1099-NEC for student stipend (and standard deduction for dependent)

[NotLearnedHand]

Hi, 

I am trying to help my college student with his taxes (he is over 18 but claimed on my return as a dependent).  He received a stipend which is over $1,100 (but not by that much) and was reported on a 1099-NEC (his unearned income should be under $350).

This stipend was more like payment for services than a scholarship-- it was compensation from the school for  taking on extra responsibilities like being a TA.  As such, it appears it would be subject to income tax, but not subject to self-employment tax.  Does that sound right?    

However, it appears that if I report it in turbotax as a 1099-NEC for "money not earned as an employee or self-employed individual" then he is stuck with the $1,100 standard deduction and pays tax on the amount above $1,100.  Is that the right outcome?  

I offhand had told him that since the amount was so far under the usual standard deduction he wouldn't have to file at all, but it seems like he is stuck between various characterizations.  On the one hand, if he is treated as self-employed, I think he would owe SE tax but not income tax? Or the other hand, if his 1099-NEC income is not considered employment income he can avoid SE tax but may be stuck with the $1,100 standard deduction?  But the only reason he is paying tax on this amount is that is it payment for services, not a scholarship, so it seems a little unfair that it doesn't count as earned income for purposes of the standard deduction?  No one actually earning this amount would pay tax on it.

Am I missing something?  Thanks for any advice.

[hbl3973]

NotLearnedHand,

There are several questions you pose.

(1) Is money reported via 1099-NEC self-employment income?  Answer: yes.  See https://www.irs.gov/government-entities/indian-tribal-governments/itg-faq-2-answer-what-income-is-co... 

(2) What is the standard deduction of a dependent?  Answer: the maximum of $1,100 or (earned income + $350) but no more than $12,550. Also, the IRS instructions for form 1040 states:

You must file a return if any of the following apply.

• Your unearned income was over $1,100. • Your earned income was over $12,550. • Your gross income was more than the larger of—

• $1,100, or • Your earned income (up to $12,200) plus $350

Do taxpayers with self-employed income owe self-employment tax?  Answer: yes if net self-employment earnings are at least $400.  This is the government's way of collecting social security and medicare tax on all earned income.  If your son had gotten a W-2, it would show those taxes taken out of his gross pay.  Being self-employed, he has to cough up the equivalent, actually twice as much because he pays both the employee and employers share.

Bottom line: From the information you have provided, TurboTax has followed the correct procedure.  It also subtracts half of that self-employment tax from his income, a small gesture, to be sure.  

[NotLearnedHand]

Thank you very much for your response but I don't agree that the text you cite demonstrates that all income reported on a 1099-NEC is necessarily self employment income, unless you mean to suggest that the IRS computers will likely expect that income to be reported on a schedule C (which is a slightly different point).

I have spent a fair bit of time trying to research this and I think the majority view, although it is not unanimous, is that student stipends are generally not subject to SE tax where the student is not functioning as a self-employed individual (which seems to be most of the time).  I think the situation is similar to honoraria, which I understand are reported as other income not on schedule C (unless of course one's business is giving speeches).

I guess one option would be to just report it on Schedule C on the assumption the computers will like that better, but it does not seem to accurately reflect the situation, so I would be more inclined to report it as other income (and give up my complaints about the standard deduction) but I am curious if others have additional thoughts.

[ColeenD3]

The instructions on the back of Form 1099-NEC state:

 Box 1. Shows nonemployee compensation. If the amount in this box is SE income, report it on Schedule C or F (Form 1040) if a sole proprietor, or on Form 1065 and Schedule K-1 (Form 1065) if a partnership, and the recipient/partner completes Schedule SE (Form 1040).

You said yourself," This stipend was more like payment for services than a scholarship."

Report the income on Schedule C.

Follow these steps to go to the Schedule C section of your return:

On the top right corner of TurboTax online screen, click on Search (or for CD/downloaded TurboTax locate the search box in the upper right corner).

1. Type in “schedule c” (or for CD/downloaded TurboTax, click Find).
2. Click on “Jump to schedule c”.
3. Click on the blue “Jump to schedule c” link

[NotLearnedHand · Accepted solution]

 I did not agree that simply getting a 1099-NEC means the income must be reported on schedule C, so I filed for an extension and did some more research.  I am updating as an FYI for others. 

According to the IRS (tax topic 421, https://www.irs.gov/taxtopics/tc421)  amounts received as scholarship or fellowship grants are taxable if received for services, but then the IRS states 

• If filing Form 1040 or Form 1040-SR, include the taxable portion in the total amount reported on the "Wages, salaries, tips" line of your tax return. If the taxable amount wasn't reported on Form W-2, enter "SCH" along with the taxable amount in the space to the left of the "Wages, salaries, tips" line.

It is clear from this that the IRS expects that some students will receive 1099-NEC for this income but does not expect them to report it on schedule C.  Reporting it as wage income (as directed by the IRS) means that students below the personal exemption threshold will not owe tax on it.

[NCperson]

@NotLearnedHand - the "self employment" tax represents the Social Security and Medicare tax.  It is no different that what a W-2 employee has withheld for services rendered with their employer.   

As you describe the payment as a compensation payment for services, and not a scholarship, why is it not subject to Social Security and Medicare tax, no different than any other American worker who pays their fair share of Social Security and Medicare tax for worked rendered?

You further state that 

"It is clear from this that the IRS expects that some students will receive 1099-NEC for this income but does not expect them to report it on schedule C."

Can you please post that link as it is not clear to me from your post where the IRS expects 1099-NEC income not to be reported on a Schedule C in this circumstance.  

The link you do post is specific to scholarship and grants (which are normally reported on 1098-T forms and do end up reported as wages with the 'sch' designation).  You acknowlege in your original post that this is income for services rendered and not a scholarship and grant.  So i am not following the logic flow.

thanks 

[Hal_Al]

The school was wrong to issue a 1099-NEC for the stipend.  It should have been reported as either Scholarship (box 5 of the 1098-T) or wages on a W-2.

Students that work for their school are exempt from FICA (social security and Medicare) tax.  In my opinion, you are correct to report it as SCH income on line 1 of for 1040 (line 8r of Schedule 1, starting with 2022 returns).

That said, your student may get a notice from the IRS as The IRS considers anything on a form 1099-NEC to be self employment income.  If that happens, you should reply to them with essentially the same explanation you used in this thread (except no, the  IRS does not expect that some students will receive a1099-NEC for this income ).

[NotLearnedHand]

Thank you for the responses, and I appreciate the point about not matching in the computers.  For what it's worth, I think the problem here is that there are three types of compensation a student could receive from a school--

1) a scholarship -- which is essentially just a discount off the price of tuition, reported on 1098-T and not taxable

2) wages-- where the student is employed by the school and paid an hourly wage (working at the library for example), which is reported on w-2

3) a stipend-- where the student receives a sum in exchange for "teaching, research, or other services".  This is a situation where, for example, a student might agree to TA a class and get $500 for it.  It's not a scholarship in part because the student isn't require to use the cash to reduce tuition.  It's not wage income because the college is not treating undergraduates being TAs for a class as a job or the student as an employee (and to me the IRS in topic 421 seems to be acknowledging as much).  

It is clearly taxable. I think it could be reported as "other income" (like an honorarium) but what's interesting is if you follow the IRS instructions then the student will get the benefit of the personal exemption and may not owe tax on it, but if it's treated as other income they they are more likely to owe tax on it (but in either case it SE taxes would not apply).  

It's possible I am wrong and the college should be reporting it as w-2 income, or the student should be reporting it as other income-- sort of depends whether you think tax topic 421 is saying "here's what to do if your school gives you the wrong tax info form" or "here's what to do for stipends, which are taxable even though they aren't w-2 income".  And the question of what makes the most sense for future engagement with the IRS is another question...

[Hal_Al]

For an alternate way to enter (and get it on line 1 of form 1040 without the SCH notation) see:

https://ttlc.intuit.com/community/college-education/discussion/re-how-to-report-1099-misc-received-f...

[hbl3973]

In VITA, just had a similar situation with a 1042-S rather than a W-2 for a stipend for an international graduate student in the US for more than 5 years.  The university refused to change the forms so I reported it as scholarship income (which isn't subject to FICA and is usable as earned income for IRA purposes) and added an explanatory note to the return.