Other Income not being added to Earned Income in calculating standard deduction for dependent

Question

Our son(19yo in college, dependent), has total income of about $6000, which includes some W-2(~$2500) and some miscellaneous/other income(~$1800), and div/CG(~$2000) from a mutual fund. As a dependent, his standard deduction should be calculated as his earned income plus $450(so about $4350). But FreeTaxUSA is not adding the other income to this calculation. It seems like a bug in the software, but I don't want to pay for the deluxe version to chat with someone about their problem. Have any of you experienced this? Or am I missing something?

GeorgeM · Answer

Hello Sageyh:

For purposes of the standard deduction, and tax credits too, earned income consists of W-2 wages, salaries or tips, and net earnings from self-employment.  Income reported as “other income” is not included in the category of earned income and thus, your standard deduction will not change after you report the income as other income.

If you have not already done so, you might consider entering your Form 1099-NEC in the section Business Income (Schedule C).  Assuming you have a net profit—that is, your expenses do not exceed your income—you will then have earned income and you may then see a positive change in your standard deduction.

Entering your Form 1099-NEC as business income will subject to you to not only income tax, but also, self-employment tax.  While a higher standard deduction may offset any income tax owed, you may still be subject to self-employment tax as it is a separate tax from the income tax, and will apply in your situation assuming your net income from your business is $400 or more.

Sageyh · Answer

I am having a similar issue. I worked with a non-profit as a volunteer with a living stipend. I put this into my other income section because it was NOT self-employment, despite that they gave me a 1099 NEC. FreetaxUSA now is only showing my standard deduction as 1350, when i know my earned income plus 450 is more than that because this other income WAS earned ( I was an employee, had to go to staff meetings etc). Any tips?

KeriC · Answer

@Torgesen

1099-NEC income is considered self-employment income and does need to be reported on Schedule C.

"Other Income" isn't considered earned income by the IRS, but Schedule C income is.

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