Paying SE taxes for side hustles; Is dad’s money a gift?
Q: I’m a high school English teacher and just started writing articles for an online magazine. By just started, I mean I’ve written an article! They liked my approach and I was asked to join a Zoom meeting to discuss other articles with a team of authors. I was paid $70 for the article, but I just love to write and my students loved reading my article. My question is whether I have to pay self-employment tax. This will always be a part-time project and I don’t feel like I’ll ever have a ‘business’.
A: If the only article you write is the first one, I agree that you can’t be in a store. If you plan on sticking with this task, chances are you have a business.
There is no specific definition of a company for tax purposes. The common interpretation is that a business exists when you do something regularly, continuously, and on a significant scale.
Your English skills have probably already asked you what you mean by these terms? There is no answer to this question. Each case depends on the facts.
You can save by calculating self-employment tax (SE). Tax is calculated according to Schedule SE. It only applies if you have net SE income of at least $400 for the year.
The SE tax is 15.3% of your net income. This corresponds to the wage tax of 7.65% for the employer and the tax of 7.65% for the employee. Since employers can deduct what they pay, SE tax is only calculated on 92.35% of SE income.
This means if the law says SE income must be $400, it’s actually $433 (400/0.9235). In your case, the first six items are exempt from SE tax.
At $70 per item, you would get $420 for six items. This would then be multiplied by 92.35% to arrive at an SE income of $388. Since this is less than $400, you would owe no SE tax.
The seventh item would cost you money. Your income of $490 is multiplied by 92.35%, which equals $453. The SE tax is then $69. They net $1 compared to six items. Since you also have to pay income tax, you end up losing money on the seventh item.
My advice is to write six articles or fewer, or eight or more. “Lucky” seven will be unlucky for you.
Q: I lost a full-time job eight months ago and was only able to find a part-time job. My father is a widower, lives alone and no longer drives. He often needs help to get to the doctor or to go shopping and I am his main driver. He always pays me for gas. He usually gives me some money for my time as well. I never ask for money and we have no agreement that I will be paid. Do I have to report income?
A: I’m not sure if there is a definite answer to this question. The problem revolves around intention. So what does your father intend to do with these payments? I can not answer that.
If he intends to give it away, you will have no income. If he intends to pay you to serve as a driver, you have an income.
Tax law states that a gift is a transfer made for “unbound and disinterested generosity.” There is no exchange, i.e. no return (this for that).
If your conversation is, “Dad, you don’t have to give me money,” and his response is, “I know, I just want it,” your arrangement is likely one of distant and disinterested generosity rather than payment for services.
Your question implies that your father’s intention is a gift. You say you don’t charge or don’t seem to charge money to be his driver.
Your father doesn’t deduct the payments, so the government doesn’t lose revenue if you don’t report income. This is not the “test” for the status of the payments, but it does mean the family is not securing an abusive tax benefit.
If I understand the main part of the conversation correctly, my advice is to treat the payments as a non-taxable gift.
James R. Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at [email protected]