What if a client was on the verge of losing their health coverage under Obamacare or lost it because they have a pre-existing condition?
The answer, of course, is “no” to both. In order to serve, the business must provide the necessities of life, a lot of them. And in some cases, the necessity of the employee’s service will be for more than your financial benefit. To be sure, if your client is likely to lose insurance coverage, but does not live in a place where the cost of insurance costs more than twice your income, your client’s service would not be a taxable service at all. (For more, read about “taxable” services and what that means for each federal tax bracket.)
But, if your client lives in a place that is far different on the income scale or a place that might have higher costs for insurance (or worse, higher premiums), you’ll have to decide whether your client should be considered a dependent even though your client earns income in that area. The answer depends upon what you mean by a dependent, and whether you classify the client in a way where you want the person receiving the service to be considered a person.
For example, suppose the client receives some assistance with the day-to-day management of the business, but also pays the bills. If you classify their contributions as a taxable source, the client’s share of expenses may be more than a client’s share of expenses in the context of your organization or their income.
In deciding whether to classify the contribution as a taxable service, what you should keep in mind is that some people classify their contributions as an income source, in which case the cost of the service has been included as an income source. For example, if the client contributes $50 for a pet sitter in a state where pet sitters are taxed as individual taxpayers, the payment from their own pocket has been taxed as a taxable contribution. Conversely, a donor to an organization can, and does, classify his charitable contribution in the same way. As a donor to your organization, the contribution is classified as an income source; a donor donating to your organization, or to a non-taxed non-profit, has the charitable contribution taxed as normal income. But if you are the non-profit and would pay the organization for its services because of the contributions, the contribution may be included in the organization’s tax filing as ordinary, or as an exempt charity under IRC Section 170.
For example, suppose you
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