Background - I am working on my daughter's tax return. She is on her own, another state, in fact, but at 24, still on a family insurance plan with me. She has multiple jobs, 6, and as I look at the W2's she forwarded, I see a 1099-NEC instead for one place she worked. Looking at pub 1779, which is now 10 years old, has a description of Independent contractor vs employee, and there is nothing about the work that should have her as a
1099 contractor. She is not comfortable discussing this with the company, so I'm moving forward.
I know this income will go on Schedule C (and she'll pay 2X FICA on this amount), but the one real question I have now - How much of her health insurance cost can go as an expense (line 14) against this income? FWIW, the amount is about 25% of her total income for 2022.
I've filed Schedule C for myself in any number of tax years. There are record-keeping requirements when I'm in business for myself. Other than statutory employee/non-employee, in my opinion, making that bright-line distinction has to take into account where the work is performed and if the work is performed at the payor's site, then whether the payee brings his own tools. If the payee works with the payor's tools at the payor's job site, it's hard to argue that the payee isn't an employee. You're probably right that it was mischaracterized.
At this point, if she's not taking the position that the income was mischaracterized, then the onus is on her that she was a sole proprietor for this period, and that comes with all the record-keeping requirements of being in business for one's self.
On the other hand, if she takes the position that she was an employee, then her take-home pay is net of withholding for FICA and HI (I assume Additional Medicare Tax doesn't apply), in other words 100%-7.65%=92.35% of gross wages, ignoring income tax withholding. If she takes the position that she's an employee but her take-home pay was her gross wages, in theory, she could owe 1/2 of the undeposited Social Security taxes but they'd really come after the employer.
It's not a good position to be in. Let her learn a lesson that both parties must agree to employee versus non-employee up front and that the employer doesn't want the expense of payroll tax deposits DOES NOT make her a non-employee. In order to be a non-employee, she truly has to be in business for herself.
Don't forget that 1/2 of self-employment tax is an expense and the Qualified Business Income Deduction.
If she's taking the position that she was self employed on the days she was on that job, and employed on the days she was on the 5 other jobs, then up to the pro-rated share of that number of days of the year. But she'd better have business records showing this as I'm assuming she didn't literally write you a check for her share of the family medical insurance for this period.
Best for your daughter to talk to the employer, as uncomfortable as it may be. Perhaps the employer is acting with the IRS's blessing. More likely, it is skirting the law. If that doesn't resolve, she should file an SS-8 for an IRS determination of her work status. If you/she file the Schedule C when she is truly an employee, you/she will be enabling the employer's incorrect and possibly fraudulent misclassification. If the IRS does not give a timely response to the SS-8 filing, she can proceed with Form 8919.
You may know this already, but in case you don't, if your daughter should have been classified as an employee, she can file IRS Form SS-8 to notify the IRS of the situation. Then she can file Form 8919 essentially to eliminate the employer's portion of the self-employment tax on her Schedule C.
If eligible for this deduction, so far I think 100% of the health insurance cost gets reported on her Form 1040, Schedule 1, Line 17.
One requirement for eligibility is that your daughter's "business" has to show a net profit on Schedule C.
I have other questions about who is paying for what here. E.g. if this is a family insurance plan, then your wife and you technically pay the premium, right? I presume your daughter is reimbursing you all for her share. Is it kosher for the daughter to take a deduction for health insurance for which your wife and you technically paid?
I presume you have already looked into questions like this. I am just not sure whether there is more that needs to be checked here before proceeding.
I just confirmed with her about the 1099. She is a dancer. This is a part time position teaching class. Apparently, the studio that pays her acts as third party arranging classes taught at a public school. To be clear, she shows up at a particular school, and teaches a class, twice a week. At least this makes sense why they 1099 her.
No, she does not reimburse me for the insurance. For 2022, it would seem that the fraction of the insurance (at age 24 vs me at 60, I would even assume 1/2 is her's) and this work only being about 25% of her income, it's not worth attempting to write it off.
Preparing for 2024 (tax year '24, filing in '25) when she is on her own insurance, can you give me a hint what records she'd need to keep to take some insurance deduction? None of the W2 employers are providing any benefit, and I take it, just pro-rating the 1099 income over total income is not sufficient?
There’s another possibility with this. A previous response on this newsgroup pointed out that a 1099-NEC doesn’t always imply self-employment income and a Schedule C, etc. If the 1099-NEC was for some one-off activity not related to her career or normal work, it’s possible the 1099 was mischaracterized and should have been a 1099-MISC. For this reason, you (or whoever does her taxes) should consider asking her what activity this
1099-NEC covered and whether it was actually legitimate Schedule C type income or just a one-time activity you report as "Other Income".
I would suggest starting a business as a dance instructor, letterhead and business cards and brochures and a Web page, cell phone specific to the business, separate bank account, while keeping very careful records of receipts and expenses applicable to the business. If she can show that she's taking on students throughout the year, or she accepts work in these after school classes throughout the year, then that could be adequate to provide herself health insurance through the business.
Maintaining a diary of her appointments to teach and keeping mileage records to and from her appointments and keeping receipts attributable to the business would go a long way toward demonstrating that her business is legitimate.
As long as it's not a somewhat lengthy period of full-time jobs as an employee without gig jobs, I don't see why she couldn't provide health coverage to herself through her business throughout the year.
I'm more concerned about her finding a somewhat affordable individual policy. Sometimes one can join a professional association that may offer a group plan.
The plan is just the two of us. (Wife is 65+. Medicare) No, I haven't been asking her to reimburse me for her share of the premium. In hindsight, I may have had her track her hours carefully, only it wasn't until a few weeks ago I saw that one job 1099ed her. She also has
5 W2s. For the 1099 income, and the potential $200 tax savings (i.e. not much income from this gig, and 10% tax bracket), I'm not going to bother her with tracking this. I'll file the required Sch C and move on.
I'll revisit this if her 1099 income goes up, to a level where the tracking is worth it.
I don't agree. She shouldn't retroactively set up a business. She should do it now. The point is to make the health insurance plan she needs more affordable and if carrying the health insurance through the business is a way to make it more affordable, then do it that way. She's a dancer and dancers are subject to injury and she'd need to look for a plan that includes rehab.
I think if she makes sure she takes gigs throughout the year, then she's got a legitimate year-round business which makes carrying the health insurance as a business expense reasonable.
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