I have a client who was having some financial challenges. The couple had over extended themselves and created a harmful tax liability, all while being taxed at a high marginal tax rate.
So at one point the couple’s family tried to help. But with one hand they giveth and with the other hand they taketh away.
The relatives gave money to mitigate the problem, but then issued the couple a 1099. So at the minimum, the couple was in a 25% tax bracket. Once the 15.3% self employment income tax rate and the state income tax rate of 5% were factored in the calculation, the client had a tax liability equal to at least 45.3% of the assistance.
The client did not make allowances for this with their tax withholding which resulted in an under withholding penalty.
Thus, the help created more harm than good. The good intentions did not help in this instance.