Knowing what income is taxable

Q. My neighbors pay me to shuttle their kids back and forth from school and activities when they’re at work. Do I need to declare this income or create and actual business? It’s sort of like babysitting money.
— Sort of working

A. You’re correct that driving the kids around is similar to babysitting.

And this is income you may need to recognize.

The Internal Revenue Service considers any income you receive in exchange for performing a personal service to be taxable income, said Brian Power, a certified financial planner with Gateway Advisory in Westfield.

“It does not matter what the personal service is, or in what manner the income was paid,” Power said. “As long as the income was available to you, whether or not you actually have it in your possession, it is subject to federal income taxation.”

Power said if you receive cash in exchange for babysitting for a neighbor, that cash is taxable income. If the neighbor pays your way to the movies in exchange for your babysitting service, the IRS considers the value of the movie ticket to be taxable income, he said.

If the person you shuttle kids for has the right to control what you do, when you do it and how you do it, the IRS might consider that person to be your employer, Power said.

But how your income is reported and taxed is differently if you work as an employee versus working as an independent contractor.

If you work as an employee, Power said, the person you work for should provide you with a W-2 detailing how much you were paid during the year, as well as how much money was withheld for Social Security, Medicare, retirement benefits and any other withholdings. You should report your shuttling service earnings along with your other wages, salaries and W-2 earnings on Line 7 of Form 1040.

The IRS would consider you to be an independent contractor if the person you shuttle kids for does not have the right to control what you do, how you do it or when you do it, even if they have the right to direct the results of your work, Power said.

If you shuttle kids only on an irregular basis, you are probably an independent contractor.

If that’s the case — and we’re guessing it is — your neighbors would not withhold any money from your pay. If you earned more than a certain amount in a year, they should provide you with a Form 1099-MISC.

“You must report all of your income for shuttling as an independent contractor on Schedule C, Form 1040, regardless of the amount and regardless of whether you receive a Form 1099-MISC,” Power said. “As an independent contractor, you will be responsible for paying self-employment taxes as well as income taxes on your shuttling earnings.”

But even though you should declare all earned income, there are filing thresholds that ean you would not need to file a return and you would not owe tax, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

“If you are single, under the age of 65 and can claim your own personal exemption, then you would not need to file a return if your gross income from all sources (wages, interest, dividends, etc.) was below $10,300,” Hook said. “If married, then the threshold would be $20,600 but would include income from both spouses.”

Hook said you should also consider your liability for moving these kids around.

“You should be sure that you have enough liability insurance and that if you are not driving your own car, that you are a listed driver on the auto policy of the car you are driving,” Hook said.

Also consider what other deductions you may have from this income.

Karin Price Mueller writes the Bamboozled column for The Star-Ledger and she’s the founder of NJMoneyHelp.com. Click here to sign up for the NJMoneyHelp.com weekly e-newsletter. Like NJMoneyHelp.com on Facebook and follow it on Twitter.