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I'm 58 years old, and living at home with my parents. I do some things to help them out, but they are being a bit generous to let me stay in an addition that my grandmother built on to their house. I also do house and other work for them. I do a fair amount of gardening and various internet research for them, and a little house work. Mostly, it has been they eating the garden veggies grown last year (which were well worth what they paid).

My records have me earning just under $1,200 from them last year. I have contributed the earned amount to a newly-opened Roth IRA. I have also been doing investing, and while I have done well in previous years, this year I will be reporting substantial losses. I plan to invest the Roth IRA money as well. So far, I just have a spreadsheet showing the jobs I've done for them, the dates the work was done, how much I earned, and how much they paid me for it.

I'm concerned if the IRS wanted to challenge it, if they might need some other documentation. Last year, I filed my earnings as a sole proprietorship, and paid FICA etc., as per the relevant schedules. I will make well under $10k this year, what with my investment losses. I don't know if I will still need to pay FICA contributions, since year before last, it said I don't even need to file if I make under 10k. I don't believe I will have to file a 1040 due to my income.

Questions:

  1. Will I still need to file as a Sole proprietor, even though my investment losses exceed my earnings this year?
  2. Will my spreadsheet be sufficient documentation to support this as earned income?
  3. Should my parents file something in order to support my claim that this is earned income? They are willing to.

Notes: I am aware I won't be able to take the money out for 5 years from opening the acct. without penalty, except for special situations. I am also aware there are limits on what I can contribute; and if I make enough outside of the IRA, I won't be able to contribute at all that year.

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  • If 'substantial' is more than $3k, you report (all of) the loss this year but deduct only $3k, with the rest carried-forward and used in future years when you have gains (unless you die). And the filing threshhold applies to income before the cap loss deduction. Also if you make enough you aren't eligible to contribute to Roth (currently over $139k for single) and don't already have a (significant) trad IRA, you can use the so-called 'backdoor Roth': make nondeductible contribution to a trad IRA and then convert it to Roth; there are many existing Qs about this. Dec 31 '21 at 7:01
  • Get them to send you a 1099. It just costs a few bucks to do so with online filing sites. They you have all the proof you need (at least for verification of income)
    – JohnFx
    Dec 31 '21 at 17:07
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Will I still need to file as a Sole proprietor, even though my investment losses exceed my earnings this year?

One is not related to the other. Since you've net earned more than $400 from self-employment, you're expected to file a tax return and it would include Schedules C and SE to account for the self-employment earnings. See here:

You had net earnings from self-employment of at least $400. (See Schedule SE (Form 1040) and its instructions.)

This will also be the basis for your eligibility for the IRA contribution.

Will my spreadsheet be sufficient documentation to support this as earned income?

If you're audited - it may not be. The IRS may decide to challenge your Schedule C earnings if you don't provide any additional documentation. However I doubt they'd have any incentive in doing that, other than maybe challenging the IRA contribution.

Should my parents file something in order to support my claim that this is earned income? They are willing to.

Schedule H comes to mind. With $1200 they may be below the threshold, but they may still file.

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  • If my spreadsheet may not be sufficient documentation, what would?
    – CodeLurker
    Dec 31 '21 at 0:06
  • Any additional contemporary evidence. Receipts for supplies, canceled checks from the parents with "landscaping" in memo, 1099.
    – littleadv
    Dec 31 '21 at 0:07
  • They have recently been paying me via Zelle, and I don't know if the memo says for work, since sometimes, they pay me for work and things gotten for them which I don't charge for together. I do think I can come up with transactions in my bank acct. for SOME things I've gotten at garden supply, and I have a handful of spreadsheets which summarize research I did for them; but I think many things may not have documentation if under such scrutiny. I could prob. get them to file a 1099. Do you think that might do, or should I do something else?
    – CodeLurker
    Dec 31 '21 at 0:19
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    @CodeLurker honestly I don't know how much effort you want to put in this. If I was a betting man I'd say that chances that you're audited are slim and chances that if you are audited your self employment for your parents is disqualified are high, which of those you want to tackle?
    – littleadv
    Dec 31 '21 at 1:51
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    The most significant side effect would be the IRA eligibility, if they disqualify your earned income and you lose the IRA eligibility you'd be subject to the excess contribution penalty (6%/year until withdrawn).
    – littleadv
    Dec 31 '21 at 3:18

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