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According to your information - your income should be classified as self-employment income.
It should be reported on th schedule C or schedule C-EZ, and
will be subject of self-employment tax - 15.3%
If you and your spouse each have net $4000 self-employment income -
your estimated self-employment taxes will be $1130
minus earned income credit $457 (if you do not have any dependents)
minus Making Work Pay credit - $460
and your net tax liability will be $212
Please also be aware that if you are on disability and will receive earned income - your disability benefits might be affected.
Let me know if you need any help.
With $7500 gross self-employment income and two dependents (assuming they are eligible for EIC) - here will be your estimate:
your estimated self-employment taxes will be $1060
minus earned income credit $2798 (if you do not have any dependents)
minus additional child tax credit - $595 (if both children are below 17)
minus Making Work Pay credit - $432
and your net tax refund will be $2765
Your mother in law does need to pay or report anything if your situation.
Your mother-in-law may hire you as an employee or as a self-employed contractor.
A general rule is that anyone who performs services is an if he/she is not in control what will be done and how it will be done.
Facts that provide evidence of the degree of control and independence fall into three categories:- Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?- Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)- Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
There will be less paperwork if you are self-employed contractors. You may sign an agreement with your mother-in-law for providing services - not for working specific hours. In this case your mother-in-law doesn't need to file the form 941 (which is filed by employers.
You may have EIN for your business - in this case you will use it on the schedule C - http://www.irs.gov/pub/irs-pdf/f1040sc.pdf - see header box D, but you are not required to have it.
If you are self-employed - you will use schedule C for your self-employment income and expenses - http://www.irs.gov/pub/irs-pdf/f1040sc.pdf and calculate your net income. You net income from self-employment is a subject for 15.3% self-employment taxes and should be calculated on schedule SE - http://www.irs.gov/pub/irs-pdf/f1040sse.pdf
You will use 1040 form - http://www.irs.gov/pub/irs-pdf/f1040.pdf for your tax return - following would be important entries:
The key point is to determine qualified business expenses and to keep a good record.