General self-employment tax question needing expert advice?

Question

I know there are a lot of variables, but I'm not looking for specifics, just some advice.  Here is a purely fictional situation (based on real events ;) ):

I make $75,000 anually and my wife makes $25,000 anually.  We typically file jointly.

My wife signed a contract to provide delivery services daily for $45 a day.  The delivery route is 50 miles.

Our adult son is now doing the route/deliveries, being paid $30 per day.

My estimate is that the $30 per day in labor to our son, plus the 50 miles per day deduction will result in a net business loss (is this a safe assumption?) thus no income tax liability.

I have 2 questions for this situation.  First, would it be better for my wife to file separately and claim the business loss on her income taxes (or would it even matter?)  Secondly, how would self-employment taxes work in this situation (in general... I don't expect anyone to try to calculate specifics, but I would like to have some idea on what to focus on and expect)

Any and all help would be greatly appreciated!

Wolfie · Answer

BBG is on the right path, but your son can be considered an independent contractor.  You didn't think he was going to earn $30 a day and not be liable for taxes, did you?

Since you are paying him the net of $45/day - gas, you have to issue him a 1099 for the monies paid.

You in turn can deduct this from your Schedule C along with either actual auto expenses or mileage.  Mileage includes gas, as well as depreciation and other factors on the vehicle.  Certain repairs, like can be deducted as well, but standard maintenance, eg oil changes, are included in mileage.

You do not have to have a "business license" to have a business for tax purposes.  A lemonade stand could be a Schedule C business.

No, your wife should report the income, and expenses, on Schedule C.  If there is a loss, then it will be carried over to the 1040 and offset other income.  If there is a profit, it raises the 1040 income.  Simple.

And if the profit is more than $400, she preps and files a Schedule SE - Self Employed Tax.

You son also has to file a Tax Return (everyone who has Earned Income does) to show his Income from the job, less his expenses.

if he shows a profit over $400, he has to file a Schedule SE.

There really is nothing special to this scenario.  You, a sub-contractor, hired another subcontractor to do the work.

If you know several "kids" like your son, you could get more routes and sub them out.  But they have to provide their own vehicle.

BBG · Answer

Yes, in the situation you describe I suspect you would show a business loss.

That being said, in the situation you describe I don't think your son would qualify as an independent contractor.  He sounds like a regular employee that you should be processing a payroll check for instead of 1099.  Especially if he is using YOUR vehicle and you are deducting the mileage for HIS route.

If he meets the criteria of a 1099 employee, you must issue him a 1099 if you want to claim what you pay him as a business expense.  You also can't claim mileage expense for a route that you pay an independent contractor to do with his/her own vehicle.

And if you issue him a 1099, now HE is a self-employed person and must file a tax return.

You see where I'm going with this?

In addition, the IRS frowns on small businesses that appear to be operating at a loss on purpose.  If the mileage offsets the small amount of gross income, that is going to be a red flag.  I mean why would anyone do that year after year except to evade taxes on their other income?

ETA:  As to your question regarding self-employment tax...if there is no profit on Schedule C, there is no self-employment tax.

General self-employment tax question needing expert advice?

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