Line 1b: Household Employee Income not on a W-2

  • Income for doing household work is reported on Schedule C ONLY WHEN the taxpayer has an independent business doing that type of work.
  • Income for household employees (defined in Pub 926) must be reported on a Form W-2 by any employer who paid $2,700 or more in 2024 (threshold amount); this is entered as a regular W-2.
    • If an employer paying more than the above amount doesn’t provide a Form W-2 or provides the wrong form (a 1099-NEC or 1099-MISC), the taxpayer must ask the employer for the correct form. If the taxpayer is unable to obtain a W-2, the return cannot be prepared by Tax-Aide.
  • Income for household employees receiving less than the above threshold amount from a specific employer for the tax year, where no W-2 was issued, appears on Form 1040 Line 1b (starting in 2022).
    • Enter the amount on the Enter Household Employee Income page [Income > Other Income > Other Compensation > …].
    • The total reported can be from multiple employers, as long as each paid less than the threshold amount.
    • If the employer issued an incorrect form (a 1099-NEC or a 1099-MISC), that form should be ignored (again, assuming the amount is under the threshold requiring a W-2). 

Poll Worker Pay not on a W-2

  • Don’t report election work as Other Income or on Schedule C (it isn’t a regular means of livelihood).  It is considered earned income for purposes of EIC.
  • If no W-2 was received, enter the pay on the Enter Household Employee Income page [Income > Other Income > Other Compensation > …]. This results in the compensation being reported as wages (earned income) on Form 1040 Line 1b.
  • Only if reported on Form 1099-MISC or 1099-NEC, then also report a 1099-MISC and offset it:
    • Enter the 1099-MISC (box 3 amount goes to Sch 1, Line 8z), and
    • Enter the same amount in [Deductions > Adjustments > Other Adjustments > Adjustments Not Listed Above] as “1099 RPTD AS WAGES” to offset this 1099 entry (adjustment on Sch 1, Line 24z).
  • Create a TaxSlayer note (page 8) explaining “Due to TS limitations, report pollworker pay as household employee income for EIC”.

Work Release or Penal Income

  • Income earned while an inmate (incarcerated), even if on work release with a private employer, is not considered earned income for purposes of EIC, Additional Child Tax Credit, or Dependent Care Credit.
  • Such income will have been reported on a W-2 and entered as such. To exclude this income from being considered for those credits, enter the wage amount on the Prisoner Earned Income page [Income > Other Income > Other Compensation > …].
    • This is not entering the same income twice – think of it as an overlay of what was entered on the W-2.

Scholarships, Fellowships and Grants – Form 1098-T

  • See Pub 4012 tab J regarding the tax treatment of scholarships and fellowships.
  • To the extent that there is reportable income [some or all of any taxable income from scholarships, fellowships, and grants can be offset by qualified expenses], the income is reportable on the tax return of the person receiving the scholarship, even if that person is the dependent of another taxpayer.
  • See Pub 4012 page A-4 for filing requirements for dependents. 
    • If a dependent under the age of 19, or under the age of 24 and a full-time student, has 2024 unearned income of more than $2,600, including taxable scholarship and fellowship amounts not reported on a W-2, the dependent’s return is subject to the “Kiddie Tax”.
      • Note: Scholarships are ignored when determining dependency – they are treated as funds provided by a third party, not by the child or the parents. 
  • Scholarships are treated as earned income in determining if a student has a filing requirement, for both the federal and CA return. A dependent must file a return if any of the following apply (double amounts if MFJ):

1. unearned income over $1,300

2. earned income over $5,540

3. gross income more than the larger of —

       a. $1,300 or

       b. earned income (up to $5,090) plus $450.

CA policy:  If the CA return is out-of-scope due to Kiddie Tax, then the federal return is also out-of-scope. We don’t do a federal-only return if a CA return is also required.

  • If box 6, “Adjustments to scholarships or grants for a prior year, has an amount, see NTTC 4012 page J-10 to determine if it is out-of-scope, and if in scope, how to proceed.
    • For a dependent student, if the parent (for example) claimed a credit based on actual out-of-pocket expenses, then a change in the prior-year scholarship amount would only affect how much the dependent reported as taxable scholarship income on their return. If a dependent student didn't have a filing requirement and still doesn't, then it makes no difference to either the parent or the student. But if the student now has a filing requirement, that's an amendment for the dependent, but doesn't affect the parent’s return.
  • If the tuition on a 1098-T was paid by the Veterans Administration (VA; under the GI Bill), do not report it. See Pub 970, Tax Benefits for Education, for details. 
  • For any scholarship, the taxpayer must determine if the scholarship/grant amount on the 1098-T was greater than qualified educational expenses that can be used to reduce the taxable amount of the scholarship. 
    • The taxable scholarship amount MUST be reduced for tuition, fees, books, and/or equipment to the extent that the scholarship is awarded to cover specific expenses (the scholarship is “restricted”).
    • The taxable scholarship amount MAY be reduced for qualified educational expenses if the scholarship is not specific (“unrestricted”); the exact amount is a taxpayer decision, based on what is the best tax result.
      • Form 1098-T shows “qualified tuition and related fees” paid to the school during the tax year, not the amount billed. The amount spent for books and equipment must be determined by the taxpayer. 
  • Important:  The (net) taxable scholarship amount is reported on the return of the person receiving the scholarship, even though educational expenses (if not used to offset to the scholarship amount) are reported on the return of the person claiming the student. So if the scholarship is for a dependent, any (net) scholarship is reported on the dependent’s return, not the taxpayer’s return.
  • To determine the taxable portion of a scholarship; you must ask the taxpayer questions to decide how that money was used. Bogart’s Education Benefits Calculator (cotaxaide.org/tools/) is recommended, as it optimizes what’s reported as scholarship income (better than Pub 4012 page J-4 Worksheet 1-1).
  • To enter any scholarship amount that is not offset by qualified expenses, go to the Scholarships and Grants page [Income > Other Income > Other Compensation > ...]
    • Note: There is a single entry for the taxpayer (and, if MFJ, one for the spouse). If there are multiple scholarships reported as income for one person, total the scholarships, enter the total in TaxSlayer, and add a note (per page 8) documenting your calculations.
    • The amount entered on this TaxSlayer page appears on Schedule 1 Line 8r.
      • Scholarship income does not count as earned income for EIC calculations.  
  • Note: Student loans are never income. Expenses paid with borrowed funds, such as student loans, are eligible for credit or deduction if the regular requirements are met.
    • Also note that borrowed money, when spent, is a type of support, and affects the determination of whether a person can be claimed as a dependent. The person liable for repaying a loan is considered to be the person providing the support from that loan.

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