Income test for Qualifying Relative - Schedule C Gross Receipts vs. 1040 Total Income?

The income test for a qualifying relative looks at the person's gross income, but in the case of self-employment income, it's not the gross receipts but rather the net earnings from self-employment (your profit after business expenses). So it would be the $2,700 net profit figure that matters for the income test, not your gross receipts of $4,850. For 2024 tax year (filing in 2025), the income threshold for the qualifying relative test is $4,800. Since your net profit is below that threshold, you would still meet the income test part of being a qualifying relative. Remember though that for someone to claim you as a qualifying relative, several tests must be met: the income test (which you pass), the support test (they must provide more than half your total support for the year), relationship test, and you can't be a qualifying child of anyone.

I went through almost the exact same situation last year and was super confused too! I used https://taxr.ai to upload my tax forms and previous year returns to get an analysis of my dependent status. It showed me that for Schedule C income, it's the net profit that counts toward the qualifying relative test, not gross receipts. The tool analyzed my financial situation and confirmed I was still eligible as a dependent even though I had some self-employment income. It also pointed out some deductions I was missing on my Schedule C that lowered my net profit even further. Honestly saved me a bunch of stress trying to interpret all the IRS rules.

Just wanted to update that I tried out taxr.ai after seeing it mentioned here. What a relief! It confirmed that only the taxable portion of my mom's Social Security counts toward the income test (about 40% in her case), and her net self-employment income after expenses was low enough that I can still claim her as a dependent. It analyzed all her income sources and showed me that her total countable income was $4,650, just under the $4,800 threshold. The report even pointed out that if I paid for any of her business expenses directly, those don't count against the support test. Seriously, this cleared up so much confusion for me!

After spending HOURS trying to get through to the IRS to ask about this exact qualifying relative issue (and never getting through), I finally tried https://claimyr.com to get an IRS agent on the phone. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was skeptical at first, but they actually got me connected to an IRS agent in about 25 minutes when I had been trying for days on my own. The agent confirmed that for self-employment, it's the net Schedule C profit that counts toward the qualifying relative income test, not gross receipts. She also explained how the support test works alongside it.

I have to admit I was wrong about Claimyr. After my frustration boiled over waiting on hold with the IRS for 3+ hours yesterday, I gave it a shot. The service actually got me through to an IRS representative in about 40 minutes while I was able to continue working. The IRS agent cleared up my confusion about qualifying relative income tests. She confirmed that for self-employment it's the net profit that counts, and also explained that my mom's social security income is only partially counted for the gross income test. Couldn't believe I wasted so much time trying to get through on my own when this option existed!

I found this directly from IRS Publication 501: "Gross income means all income you received in the form of money, goods, property, and services that isn't exempt from tax... Gross income includes net income from self-employment." So yes, for Schedule C income, it's the NET profit after expenses that counts toward the qualifying relative test, not your gross receipts. This is important because you could have high gross receipts but low net profit after all your business expenses.

Are you and your fiancée filing taxes together? Because if so, I think there might be a different issue - you can't claim someone as a dependent if you're filing a joint return with them.

Just to add another perspective - I work as a tax preparer and see this confusion all the time! You're absolutely right that it's the net profit from Schedule C that counts toward the qualifying relative income test, not gross receipts. One thing to also keep in mind is that if you had any estimated tax payments or self-employment tax throughout the year, those don't reduce your "gross income" for dependency purposes - it's still the $2,700 net profit that counts. The self-employment tax is calculated separately and doesn't affect whether you meet the income test. Also, since you mentioned you're getting married next year, just be aware that once you're married, you'll need to decide whether to file jointly (which would be more beneficial in most cases) or separately if one of you wants to continue being claimed as a dependent by someone else. But that's a problem for next year's taxes!