One-Time Pay: 1099, kiddie tax, IRA - Get it right, now!

You can pay family and save on taxes. You could pay your child, grandchild, mom, or even a non-related person for a one-time job and not be subject to self-employment taxes.

So, for example, if you paid your 20-year-old college student $23,255 and deducted the full amount. That deduction reduced your taxes by $8,593, and your student owed only $713 in taxes on the income. Overall, your family saved $7,880 in taxes, and your child received $23,255.

This is great, but here are some questions that need answers

Do I need to give my child a Form 1099? If so, which one-the NEC or the MISC? What box do I check on the 1099?
I understand that the $23,255 was not subject to the self-employment tax. But how do I avoid the kiddie tax for my college student?
Could this one-time income be contributed to a traditional or Roth IRA?

The 1099

Form 1099 reporting is somewhat a surprise. You report most payments to individuals for services performed on IRS Form 1099-NEC. But that’s not where you report this $23,255 one-time payment.

For payments to individuals that are not subject to the self-employment tax, you report them in box 3 of Form 1099-MISC.

Kiddie Tax

The kiddie tax does not apply to this one-time payment to your college student. Why? Because the student receives earned income for his personal services.

The kiddie tax applies to unearned income such as investment income. It does not apply to earned income.

The kiddie tax rules use IRC Section 911(d)(2) to define earned income as “wages, salaries, or professional fees, and other amounts received as compensation for personal services actually rendered. The keywords for the college students are “personal services actually rendered”.

Some tax professionals have trouble getting their software to stop applying the kiddie tax to this one-time payment. This may require an override, but first make sure that you have this one-time payment on Form 1040, Schedule 1, line 8z. Per the IRS instructions, this is where you put income from a sporadic activity that’s not subject to the self-employment tax.

Contribute to an IRA

The tax code limits the IRA deduction to the lesser of (a) the deductible amount or (b) the compensation included in the taxpayer’s income.

The first question: Is this one-time payment to the college student “compensation” from the perspective of the tax code?

IRA-relevant tax code Section 219(f) states that the term compensation includes earned income as defined in Section 401( c)(2). That definition is not as expansive as we need, so let’s look to the IRS for more info.

The IRS in its regulations and audit manual interprets compensation to mean wages, salaries, professional fees, and other amounts derived from or received for personal services actually rendered.

Here, although it is different from the path for the kiddie tax, we focus on “other amounts derived from or received for personal services actually rendered. “Without question, our college student earned the $23,255 from his personal services, and it qualifies as compensation for the purpose of the IRA rules.

Key point. The $23,255 could have been paid to any person, relative or not. We used a relative as our example because that’s the most likely target for this tax-saving strategy.

As you may remember from above, the IRA deduction is limited to the lesser of the deductible amount or taxable compensation. The 2026 deductible amount for taxpayers under age 50 is $7,500.

Again, as with avoiding the kiddie tax, your tax preparer is likely going to have to use an override to get or his tax preparation software to allow either (a) the $7,500 traditional IRA tax deduction or (b) the $7,500 contribution to a Roth IRA.

FAQs

1. Can I pay a family member for a one-time job and deduct it?

Yes.

If the payment is:

ordinary and necessary for the business,
reasonable in amount, and
for actual services performed,

the business may deduct the payment as a business expense.

2. Is a one-time payment subject to self-employment tax?

Not always.

If the activity is:

sporadic,
isolated,
and not part of a trade or business carried on by the worker,

the income may avoid self-employment tax.

3. Why not use Form 1099-NEC?

Form 1099-NEC is generally used for:

independent contractor payments,
nonemployee compensation,
and income subject to self-employment tax.

A sporadic one-time payment that is not self-employment income belongs on Form 1099-MISC instead.

BergerCPAFirst, with over 35+ years of experience, offers comprehensive tax preparation services for individuals and businesses nationwide. Our commitment is to provide personalized attention while ensuring compliance and maximizing tax benefits. If you have any questions or would like to schedule a consultation, please call (201) 587-9200 or send us an inquiry.