My brother did his income taxes and mailed them in. The problem is, he claimed income so that he could get the earned income credit, and the IRS is asking for proof in the form of a W-2. His wife is on SSI and my brother occasionally does odd jobs for our parents. They paid him around $1,800 and he used this as a basis to claim the credit.
What options does he have? I can think of two myself - he can file as if he had a small handyman business, but I think he will owe more taxes than he would get with the earned income credit, or he can refile and exclude this income completely, giving up the credit. Is there another option where he can claim this money as income?
The parents could issue a W-2 for a household employee, but then they’d be paying the employment tax on their Sch H. And they’ll owe late fees on the W-2 filing.
Reporting as a small business is an option, but he’ll also have to claim any expenses related to the income, and he will owe additional taxes. If he has kids, the EIC might be more than the extra taxes, but that’s one of those things you just have to look at.
There aren’t any other options that would make it earned income.
His real worry should be whether the IRS will decide that it was a fraudulent attempt to claim EIC, which can result in being unable to claim it in the future, among other things.
That’s what I thought - it sounds like his options are fairly limited at this point. I hope this isn’t an instance where his EIC will be disallowed in the future as a result of this.
Like has been stated he’d have to receive a W2 from the parents or a 1099 income over $600 in a calendar year requires it. The taxes on a 1099 for $1800 dollars are pretty insignificant.
CPA checking in - Yes, but as an independent contractor (which is what he really was for the type of work he did) he would be liable for self-employment taxes on that income - which would add $254 in taxes to his tax return (SE taxes are not reduced by Itemized Deductions or Personal Exemptions so that amount is set in stone unless he reports the income on Schedule C and attempts to deduct some expenses related to the work he performed for his parents - which is unlikely).
The total amount of his Earned Income Credit would be - $140 if he has no qualifying children, $620 for 1 child, and $730 for 2 or more children. (this assumes the 1800 is the total amount of earned income claimed on the return)
This means that filing if he had no qualifying children as an independent contractor would actually result in him owing taxes, and he would get a reduced “refund” if he had qualyfing children.
It seems like the line between independent contractor and employee is a fine one. The IRS says:
Are you sure the “odd jobs” he did would not be considered to have been controlled by his employer? I’m not a tax expert at all but I’m quite curious where the line is here because I have a situation where I was paid without taxes withheld and given a 1099-MISC and now I’m worried that I may not have filed correctly.
It could go either way based on the specific odd-job arrangements.
The main issue in these classifications is employers trying to pretend employees are independent contractors. Although IANAL, it does not seem like a very common situation for a worker to get into tax trouble for failing to convince an employer that he is an employee.