mwalkerwadePosted in 1099, Schedule C, Small business, Tax errors, Tax preparation, tax servicesTagged , , , , , , , ,

One of my small business clients received a form 1099-misc from one of her customers for whom she’d performed a business service. The customer unknowingly reported the income using box 3: “Other Income” when she should have reported it in box 7: “Nonemployee Compensation”.

So what’s the difference? One is for payment for services performed, and the other is not.

  • Box 3 is for: prizes and awards that are not for services performed. Include the fair market value (FMV) of merchandise won on game shows. Also include amounts paid to a winner of a sweepstakes not involving a wager.
  • Box 7 is for: fees, commissions, prizes and awards for services performed as a nonemployee…

CLICK HERE TO READ THE FULL IRS DESCRIPTIONS

Does it matter?  Well, yes… In order to accurately complete the tax return, and to make sure there are no mishaps at some point in the future, my client must report this income on a Schedule C: “Profit and Loss from Business”, therefore; the amount needs to flow through from box 7 and not box 3 (which rightfully belongs on line 21 of the 1040).  If this amount is not included on the Schedule C, then you will not be able to offset the business income with corresponding business expenses, causing your taxable income to be higher.

We asked the customer to provide us a corrected form 1099-misc asap.  If you find yourself in this position, I recommend you do the same.

Blessings!

~ Michelle Walker-Wade, CRTP

103 thoughts on “1099-Misc: Other Income vs. Nonemployee Compensation”

  1. Hi Michelle: I have recently discovered that I sent out my 2010 and 2011 1099s in this manner, that I mistakenly reported the income as other income instead of non employee compensation. I didnt know until the inevitable call from a contractor saying that he was contacted by the IRS saying that he owed additional taxes because they thought he didn’t report his income correctly.

    I asked the IRS and they said that they felt I needed to correct the 1099s immediately, and I have ordered the forms. I didnt ask if the IRS will penalize these folks for the error I made? In other words, if they erroneously didnt pay the medicare and social security taxes on that income I do realize they owe it, but will they make them pay the penalties for it being two years later? That has got me the most upset about it. I am trying to correct the error ASAP, but of course the tax deadlines for both of these years has passed.
    Any help you could give about this would be greatly appreciated.

    1. Hi Dana,

      That’s a great question and an unfortunate situation for you both. What will most likely happen is that your contractor will have to pay taxes and interest on the amount due. Your contractor should ask his/her tax preparer if it would be beneficial for them to amend their tax return. At a quick glance, I do not see any clear information stating that your contractor will pay any other penalties. You, however, will probably pay $30 for each 1099-misc that needs correcting. Check out Intuit’s online service to see if you can amend it online. This will cut down the wait-time. I use this services for my and my clients 1099-misc filings. The web address is: http://payroll.intuit.com/efile_1099/

      I hope this helps!

      -Michelle

  2. “1099-Misc: Other Income vs. Nonemployee Compensation
    « My Walk Tax Time” was indeed a great blog post and
    therefore I really was really glad to find it.
    Thank you-Floyd

  4. I have a question that no one seems to know answer to…If you are a finance manager (not a salesperson) at an auto dealership and earn commission from selling extended warranties in addition to your regular job….are you supposed to file under line 21 or schedule c. The income is reported on box 7 so it seems that it would not be right to report it on line 21. She earns about 17000 a year for these warranty sales. She is not really self employed however it is in box 7 and she is providing a service. I know there is a publication regarding manufacturer incentive payments that go on line 21 for car salesman. But she is not a salesman. She is a finance manager. Any advice would be appreciated.

  5. Hi Catherine,
    The employer should (or could) must include the additional income in her w-2 wages. But, if the employer does not, he should give her a 1099-misc using box 7 (for services performed). Upselling is a service performed. Therefore, this person will have w2 wages plus what the IRS considers “self employment” income. Those are the only two appropriate categories for earned income.

    Hope this helps

    1. Regarding the finance manager of the auto dealership and the fact they must file these 1099-MISC box 7 income from selling extended warranties as “self-employment” income, could one put this on a schedule C and say offset their personal cell phone expenses, along with other sale related expenses they incur to close a deal to provide upper class service for the client? For example meals when the sale is taking hours to close and finalize. Or for instance add-ons, such as floor matts, or oil changes, etc? Or should these go on the Schedule A as an unreimbursed employee business expense?

      This specific situation has always bothered me due to the fact there is no guidance on this specific car dealership matter, and I personally do several finance manger’s tax returns. With the long hours they put in above the actual salesmen, I would think there would be some sort of break in here. I know they put in incredibly long days.

      Any thoughts on this view on those streams of income?

      Thanks for the input!

      1. I’m sorry Theresa… With all the holiday celebrations and such, I missed this post.
        Do you still need input?

        I can tell you from and IRS standpoint, they would not take “long days” into account. The law for business expenses is “whatever is normal and necessary to conduct business” and because most of their day and most of what’s needed to conduct business is provided by the employer, I do not believe this line of reasoning would stand up to an audit. Are they using their personal cell phones to make the upsell because the employer does not provide them with a phone?
        Now, if they purchase a meal for a client, then yes those meals could go on the Sched C. Just make sure your client is noting who they ate with and what was discussed on the receipt.
        If the salesman is paying for floor mats and oil changes, is it as a courtesy of the vehicle their selling to the client? (yes, write-off) Or is it because the salesman is driving the vehicle back and forth to work? (no, the IRS would see this as a taxable fringe benefit).

        What a topic you’ve brought up here! Very interesting I must say!

  6. Hi, thanks for the great blog post. Question, if you have time – I received a 1099-Misc for a discrimination claim settlement and the amount is reported in Box 7, Nonemployee Compensation. But I performed no services and the tax web site I’m using isn’t giving me an option except to include this 1099 under my self-employed business income. But it has nothing to do with my business. I could include the amount under “Other Income” on my 1040 but then that wouldn’t line up with what the IRS has on file, since the payer put it as 1099-Misc. – right? Just not sure what to do. Thanks for any info!

    1. Go ahead and report it the correct way… Use BOX 3 (not box 7). If the efile program you’re using gives you the ability to attach or type in a note some place, explain what you did and why. If not, don’t efile it. File it by mail and attach a written note with copies.

      Thanks for asking 🙂

  7. Thanks very much for the info and quick response!! There isn’t a place to write a note, unfortunately. Does the IRS automatically check to make sure you put the income in the same box as the 1099 did, or do they only do an automatic check of the overall amount to make sure you aren’t underreporting your income? If it would lower our risk of having a problem, then I will just put it under Box 7 like they listed it.. ? Thanks again!

    1. Yes, they will check but it doesn’t mean they’ll fix it without you sending a note. When a mistake like that happens, you’re actually supposed to report it correctly and send a note about it. You’ll pay more taxes if you use box 7 because it will trigger both “regular income tax” and “self employment tax”. Box 3 will only trigger “regular income tax”.

  8. Does anyone know if a 1099 box 7 non employee compensation is taxable income . I worked in childcare this year , and only box 7 is filled in . I have 1 six year old dependant I am curious if this is taxable income or income that I dont need to pay taxes on . Thank you in advance! !

    1. Hello… Yes it is “earned income” and it is taxable; but depending on the amount of income you received from all sources in 2014, you may not have to do anything with it. I’d need to know more information to give you a better answer.

      On another note, generally speaking, the law does not allow “childcare workers” to be classified or paid as 1099 contract workers. They almost always have to be hired as full w2 employees because childcare workers do not meet the Federal guidelines for 1099 employees.

      Thanks!

  9. I used to contract with a church. They recently sent a 1099 with the money shown in box 7 nonemployee compemsation. The next week they sent another 1099 with the same exact amount of money but in box 3 as other income(which is incorrect). What do I do?

    1. Hi Robert,

      If the amount on the 1099-misc represents money they paid you for a service you performed for them (musician, trainer, printing…) they should have used box 7. The church needs to send you another corrected 1099misc BEFORE you file your taxes, otherwise the IRS’s computerized system will still be expecting you to report the income from box 3. The problem with box 3 is that it doesn’t connect to Schedule C, which is were contract/freelance income and expenses are supposed to be reported.

      You should contact the church and have them correct this mistake as soon as possible.

      Thanks!

  11. I received a 1099misc box 3 of $590,000 for settlement when my house burnt down. This payment was meant for the six occupants in the house. Of which I cut a check for 1/6th to each of them.
    I’ve been told by my tax guy that I cannot deduct expenses with box 3 and if I report it as self employment with the 5/6th deductions I will still have a whopping Self Employment tax liability! Is this right?

    Regards

    Tony

    1. I hate to say it, but your tax guy is correct. You can’t report it as “self-employment” income; the IRS will kick it back as soon as they catch it. Then you’ll have to amended your taxes and pay the tax plus any possible penalty and interest assessed. If there were any legal fees involved you could deduct them on your Schedule A for Itemized deductions; but that will be a drop in the bucket.

      Ideally, it would be best if every adult in the home had been able to receive their own payout instead of it having to be distributed through you; or if you could have reduced the $590,000 by 30% and then distributed 1/6 of the balance to everyone. Then you could have saved the money to pay the taxes. Many people get caught off guard be these types of payouts.
      My apologies!

  12. We are an Urgent Care company with centers in 3 states, we have a Dr. that was a contract employee and received a 1099 last year. This year we hired him full time and he was on payroll but then his hours were cut at his regular clinic and he is now floating, working in all 3 states. If we reduce him to part time and keep on the payroll in his regular work state and use him as a contract employee for the hours he works in other states? If we do that, would the amount paid in the other states be Other Income – Box 3 or Non-Employee Compensation – Box 7? Is that even allowed, to be an employee and a contractor for the same company??

  13. Would you report raffle prizes it in box 3 or 7 if you award a prize to an independent contractor? In order for the contestants to qualify for the raffle they must sell a minimum dollar amount, but once they have met the minimum sales amount all that are in the qualifying pool would have an equal random chance of winning the prize

    1. Hi Steve. I’m curious to know… Are these folks really “independent contractors”? Independent contractors perform a service in exchange for compensation or sell a product in exchange for a commission. Any money they earned and were paid as compensation is reportable on Box 7 of the 1099-Misc. However, raffles are not viewed and 1099 reportable income by the IRS. To them, a raffle is a type of lottery (or gambling). That income is to be reported on a form W-2G.

      1. Yes, they are sales agents we are doing a promo with too reward and encourage sales. I was thinking since they don’t pay cash to play, it wouldn’t be gambling though. They just need to sell to get a ticket. Thanks

  14. Hi Steve. I’m curious to know… Are these folks really “independent contractors”? Independent contractors perform a service in exchange for compensation or sell a product in exchange for a commission. Any money they earned and were paid as compensation is reportable on Box 7 of the 1099-Misc. However, raffles are not viewed and 1099 reportable income by the IRS. To them, a raffle is a type of lottery (or gambling). That income is to be reported on a form W-2G.

  15. Great site Michelle! I received a signing bonus as well as a non-compete bonus this year from a new employer, paid before I was a W-2. It looks like the non-compete was filed as a 1099-MISC in box 3 as other income, and the signing bonus was reported in box 7 as nonemployer compensation. Is this correct or do we need to have the 1099’s reissued?

    1. That’s a good one, Robert. I’d say it’s correct. Since you weren’t yet an employee (therefore not w2 wages), and it was not for services performed or to be performed (therefore box 7, 1099-misc), and it would not be appropriate in any of the other boxes on the 1099-misc, the process of elimination puts it as “other income” in box 3.
      That was a first!

      Thanks for the challenge and for the compliment!

  16. Hi Michelle,
    I am an attorney working on a class action settlement and have a question regarding Plaintiff’s recording of settlement payments for actual damages. Plaintiff’s have recorded the income as nonemployee compensation rather than other income on the 1099-MISC. This particular lawsuit involves a large corporation as the plaintiff and the receivers of the settlement awards are tenants, therefore no services were performed. Can you please advise as to how to proceed?
    Thanks for any help you can provide.

    1. Hi Dancingbirdy,

      You (or the plaintiff) should quickly call the issuing organization, make them aware of the error, and ask them to send you a “Corrected Form 1099-misc” right away. The organization is required to correct the error and provide a updated copy to the taxpayer (the plaintiff) as well is the IRS.

  17. Great thread! My full-time employer reimbursed me for $85 I paid to enroll in TSAPre as part of a travel benefit they have. In addition to my regular W2, they sent a 1099 with Box 7 filled in with the $85. My tax software is forcing me to fill out a Schedule C for that $85, but I wasn’t a contractor or freelancer (am employed FT by this organization) and it wasn’t for any services rendered. I’ve emailed them repeatedly about it and they seem unwilling to do anything to fix it (from what I’ve read, this should have just been added to the W2). It seems since it is filed under a 1099, it should be under Box 3 and not Box 7. What are my options? Thanks so much!

    1. Wow! I can’t believe the number of companies getting these things mixed up. You’re correct; it should not be in box 7.

      They have to fix it. I’d say it should be reported on Form 1099-misc in Box 3; but they might put it on your form w-2 in box 14.
      What to do??? How are they responding to your emails?

  18. I received a $1000 incentive to move in an apartment. The management company sent a 1099 including this amount in box 7. Should this be reported in box 3 as other income instead?

    1. It definitely should not be in box 7 because this box should only be used when you’ve been paid for a service performed. Box 3 is for prizes and awards that are not for services performed. Therefore, if you did not perform a service, the amount should not be in box 7.

  19. good evening, i worked several part time jobs this year and the employees gave me 1099s and put the amount earned on line 7. I have no expenses for those jobs. I was not in business for my self in 2015 tax year. I did my taxes and through HR Block program and the program determined that I had to pay over $3k in taxes (state/fed). I am not a small business owner. I have to now prepare a SCH. C. I have no expenses for this form.

    My questions:

    CAN I PUT THAT INCOME IN ANY OTHER AREA on the 1099 WITHOUT HAVING to pay the %15.2 for MEDICARE AND SOCIAL SECURITY TAX?? Can I get a corrected 1099 misc form the employees and not do the sch C????? How can i prevent this problem for the 2016 taxes.??????

    1. Hello Reggieg. I’m sorry, but no, that amount must be reported in box 7. The IRS system will cross-check for the the amount to be in that box only. Under IRS definition, you are now a “small business” and a sole proprietor who must file a Schedule C and pay self-employment taxes. I’m sure yo have some kind of expenses, at the very least, your partial use of your phone, computer and internet, and may be even a deduction for your home office. I hope this helps.

    1. You can call the IRS at 800-829-1040 and explain your situation. They may contact the business and/or have you attach a written statement or a Form 4852 to your tax return. The IRS hasn’t quite figured out how to deal with this growing number of erroneous 1099-misc filings. Sorrrry.

    2. If you’ve performed work for which you were paid, both you and your employer would be breaking the law if the amount was not reported in box 7; but, depending on your working conditions your part-time employer might be breaking the law by classifying you a 1099 employee (for which they could be heavily fined). You can read this blog to learn more about employee classification… https://workplacelit4adults.wordpress.com/2012/04/06/offered-1099-work-or-pay-under-the-table/

  21. Hello Michelle, great thread you got going here!

    My wife and I work at a missionary school in Southern Africa. Our mission organization sent us a 1099’s with the amount recorded in Box 7 (non-Employee compensation). The amount is a mixture of stipend from the organization and donations from supporters. Should this be classified as Self-Employment Income requiring a Schedule C, or can I put it on line 21 of the 1040 as Other Income? I haven’t figured all our “business expenses” yet, but I believe it would actually cost us much more in taxes if we filed as self-employed, because we qualify for the foreign income earned exemption. Thanks for your time!

    1. Hi Everett… Ministry is a business 🙂 Your income from those sources is considered self-employment income and the government is eagerly waiting to receive your income tax payments from it. It’s not something you have choice about. If you actually qualify for the exclusion, it could eliminate the income taxes, but you’d still have to pay the self-employment. You may want to carefully review the Foreign Earned Income exclusion requirements (https://www.irs.gov/Individuals/International-Taxpayers/Foreign-Earned-Income-Exclusion). If you qualify, you’ll still use box 7 for the 1099-misc, file a Schedule C, and also file Form 2555 for the exclusion. —- You still have to reported it via Schd C, but you’ll get to exclude it via Form 2555.

  22. Hello, I invest with a friend who does house/condo renovations and flipping. I basically supply him with an amount of money for a project. (i.e. 50k). We do a joint venture agreement. When he completes the project and sells it, he distributes back my original 50k plus a profit. At the end of the year, he reports the profit on a 1099M box 7. My question is this correct to report on a 1099M box 7? I am having to pay social security and medicare taxes on this amount. I want to make sure this is being done correctly ore should this be reported differently. Thanks in advance.

      1. Hello, I invest with a friend who does house/condo renovations and flipping. I basically supply him with an amount of money for a project. (i.e. 50k). We do a joint venture agreement. When he completes the project and sells it, he distributes back my original 50k plus a profit. At the end of the year, he reports the profit on a 1099M box 7. My question is this correct to report on a 1099M box 7? I am having to pay social security and medicare taxes on this amount. I want to make sure this is being done correctly ore should this be reported differently. Thanks in advance

  23. Hi Michelle,

    So glad to stumble upon your blog!

    If income is reported on 1099-Misc on the box 3 (other income) and not box 7 (non employee compensation), can we still report expenses? I am a delivery/sales person – I use my car for business majority of the time.

    Is it “correct” to have them report income on box 7 for 2016 and I pay SE tax and I can report expenses? Or they can continue to report on box 3?

    Best,
    Cathy

    1. Unfortunately you were given wrong information. Per IRS definition of “income” it was wrong to list it as “other income”. If you complete a task or perform a service and receive $$$ for it, it is self employment income.

    2. Hi Cathy,

      Your first step should be to request a corrected 1099-misc from the payer, then use it to prepare your tax return.

      What ever the 1099-misc says is what the IRS will expect to see on your taxes. So, if the payer puts the amount in Ln 3, and you use Ln 7, you’ll most likely receive a letter from the IRS saying you failed to report income.

      Using line 3 is wrong because…
      1) You cannot deduct expenses properly. The Schedule C, on which you’ll itemize your expenses, is connected to line 7 only
      2) Self Employment taxes, which is based on Line 7 and Schedule C calculations, would be wrong. It will result in your attempt to commit tax evasion.

      Best,
      Michelle

      1. Hi Michelle,

        One year later – company did the same thing again. I have income on Misc 1099 box 3. Can I Report it as box 3 and file schedule C and report all my expenses? ie mileage. Would that flag the IRS and request the employer to do an amendment misc 1099?

        Best,
        Cathy

  24. Question:
    I am a police officer and worked at various ‘businesses’ locally. I was in the department uniform and provided ‘security’ during the event, example, an officer present during an athletic event. I received three 1099MISC from the various “employers”. When filing using H&R Block tax cut I spoke with a tax specialist on how to enter the data. I was told to enter as ‘other income’. Since then the IRS says it is ‘self employed’ income and submitted me a bill for an outstanding balance(Self employed tax plus MediCare). They told me the payee could send me a letter stating the income belongs in box 3, not the listed box 7. Is this proper and will it ‘correct’ the situation?

  25. Dana, I think I have made the same mistake. I sent out two 1099 forms with the amount in box 3 instead of box7. This was for 2014. Do you know if IRS levied penalites?

  26. Dear Michelle,

    I am probably just ranting. I received a 1099-misc from Wells Fargo (my mortgage company) with ‘income’ in box 3 because they were fined under a lawsuit (all over the news) and sent all their mortgagees a credit off their mortgage loans (against the principal). Do I have to report this as other income on 1040 line 21? I can’t believe that IRS makes me report this as earned income from their ‘corruption’ and I couldn’t use that money for any other thing because they applied it directly to my mortgage. And, they didn’t withhold any taxes.

    I’m pretty sure I am not alone.
    Regards, C Rocker

  28. I’m trying to file my taxes online and I’ve never filed a 1099 MISC before. I’m so lost. I have income in both box 3 and box 7. The online site I’m using asked me to enter what box my income is in. If I click on box 3 it has me enter the companies info but it never gives me the option to enter my compensation from box 7. If I click box 7 then it wants me to file a C-EZ form and pay the site and I’m just not sure I’m doing this right. I’ve tried googling it and I’m getting nowhere

    1. The version of the software you’re using may be preventing you from making entries in two fields, but the IRS will expect you to report both. The box 7 SHOULD generate a Schedule C. The IRS will be looking for that as well. What program are you using?

  29. I recently wholesaled a house to an investor and was given a 1099 with the amount written in box 7. We never took ownership of the property but were paid money for our interest in the deal. Should this be moved to box 3 or stay in box 7? Thanks

    1. I’m 99.9% sure this income belongs in box 7. Box 3 is things like:

      Prizes
      Awards
      Taxable damages
      Certain benefits of a deceased employee
      Medical research participation payments
      Legal damages
      Indian gaming profits
      Other taxable income (similar to the ones on this list)

  31. I am so glad I found your site. I am an independent contractor and a doctor for the state. The state’s fiscal year runs from Oct to Sept. I received a 1099-Misc for 2016. They put the money I earned the current fiscal year 10/16-12/16 in Box 7 and money I earned from the prior fiscal year 1/16-9/16 in Box 6. They are never split into two separate boxes. Is this correct? Will this affect my return negatively? Getting an amended 1099 from the state is a nightmare. Thanks!

    1. Hi Leslie. You ‘could’ have $$$ in box 6 as well as box 7, both being income from your medical business, and thus should be attached to a schedule C. However, what is different about the two boxes is not about time period. Box 7 is for income from SERVICES performed. Box 6 is for medical payments received for things like drug testing, injections, artificial body parts and such.

      If this is not what you see recorded on your 1099-misc you should question it and request a corrected 1099. :-). That was a good question!

  32. A friend of mine works as a salesman for a John Deere dealership. John Deere, not the dealership he works for, has a program that allows him to “Spin for Dollars” when he sells a certain piece of equipment. These “dollars” are reported to him on a 1099-MISC in box 7. Is this correct or should it be considered an “award” or “prize” and reported in box 3?

  33. My husband is cable technician and received a w-2 along with a 1099-misc (he is technically a sub-contractor). On the 1099- they put over 14k in the “other income”. His boss is saying it should be considered a wash, and help us because we can deduct the 1099 from the w-2…. however our tax woman said it would have to be in “nonemployee compensation” in order to be wash and not put us in the hole. I’m confused about the entire situation please help.

    1. Hi Cindy,

      Your husband’s employer… unfortunately he doesn’t understand the tax system and how each form the IRS has created is intricately tied to other forms and other line items…

      On the 1099-misc, line 3 “other income” is not connected to any other tax form that can be used to write off business expenses, but line 7 “non-employee compensation” is. When the tax preparer inputs the data from your 1099-misc, it must be an exact match as the form. If she were to simply move that amount to line 7, the IRS will send you a nasty little note telling you that you did not report income.

      The employer is legally required to correct that form; but if they refuse, you can:
      Have your taxes completed the correct way (reporting the income in box 7)
      Attach a note explaining why you made the change
      You may have to mail or walk your tax return into to the tax office so it can be manually processed.

      Hope that helps!

  34. Hello, I recently sold my business with proceeds based on future sales. A small price was paid to my corporation as payment in full for the business to satisfy the agreed upon base price; and then I signed a 3 year personal “consultant” contract that pays me commission on each sale to the corporation’s former customers. I am required to do nothing to earn this income, and so I’m referring to it as “passive” commission. Could this qualify as box 3 “other” income to avoid the self employment tax as I’m technically not performing any services? Thanks.

  35. Hi there,

    I’m self-employed and had a client accidentally put my income on a 1099 in box 3 instead of box 7, this was in 2015. I just reported the income like a I normally would on my taxes, but now I got a letter from the IRS stating that I’m missing the “Other Income” from 2015. Now, I reported and paid taxes on it already, so how should I proceed? Do I need the client to fix the 1099? Is it an issue that this was 2 years ago?

    Thanks,
    James

  36. I rent a space in an antique store. They pay me for items I have sold in my space less commission. In prior years the income was reported on non-employee compensation. This year a new owner sent our 1099 with income reported as other income. Which would be right?

    1. If I understand you right, you’re selling the store owners product, and they pay you for selling their product. If this is the case, you’re providing a services for them, and that income belongs in box 7. —- Soorry I’m so late seeing this.

  37. Hello,
    I work for a large corporation that gives monetary awards to dealers for selling our products but these dealers do not perform any other functions for our business. Are they considered independent contractors? Are the monetary rewards taxable as other income or non-employee compensation?

    Thank you for your time.

  38. If I file form 1099-Misc (as the “Payer”) today on 2/17/18, for 2017 taxes, will I be charged a late fee or penalty because it is after the January 31st deadline?

  39. Question: I’m an attorney and this subject has been touched on in your Q&A posts but I wanted to get some clarification:
    I have a client who received money from a settlement in a civil case (no physical injuries/damages). My CPA sent the client a 1099 and put they amount they got under #7 “non employee compensation”. I got a call from the client’s tax preparer asking why the amount was under #7 rather than #3 “other income”.
    When we got the 1099 for the full amount of the settlement payment from the defendant, i believe the amount was under #7. My client was under a contingency fee agreement with my firm.
    Should the 1099 for the client be under #7 or #3?

    Thank you in advance.

  40. Question: I received part of a settlement along with a 1099misc form. I’m completely lost as to what box to use when reporting it. Where I’m filing it does not allow for both box 3 and 7 to be filled at the same time on the same form?

  41. i do my parents taxes every year. last year my father found out that his father owned property downstate (WV) that him and his siblings all inherited part off. they received a payment of 990.00 as rent for them letting a gas or oil company to drill on. they have never received any payment for anything drilled or found on property. they only got the rent payment. they got a 1099-misc with only box 1 as 990.00. i don’ know how to file it correctly and don’t want to get my parents audited… please help!!

  42. Great post, thank you for your time in advance.

    I have a daughter that I ask my grandparent to help babysit while I am at work. Can I give grandparent a 1099mic box 3 for $5000?
    This reference: http://nannyfaq.com/how-nannies-should-report-extra-babysitting-income/
    Mention: “The IRS has clearly stated that nannies and babysitters are NOT independent contractors”
    Also mention “Do not accept the 1099 if your babysitting income is reported in Box 7”

    I know grandparent should pay regular income tax on the 5k but as long as 1099 amount is on box 3, there is no self employment tax. Grandparent are not in business nor an independent contractor and have no plan to deduct any expense.

    Another reference: https://www.homeworksolutions.com/knowledge-center/my-nanny-wants-to-be-treated-as-an-independent-contractor-can-i-do-that/

    Now it seem like babysitter are not independent contractor, they are employee and anything over $2100 or more should be on w2. But anything less 1099 is still good and box 3 is ok??

  43. Could you weigh in on this scenario: A physician joins a medical group in a particular community and signs an employment agreement with the group. Prior to signing the employment agreement, he signs a separate agreement with a local hospital (unaffiliated with the group). The agreement with the hospital requires him to become an employee of the group and stay in the community for 3 years seeing patients for the group but doesn’t have any other stipulations/services, and the hospital pays him $$$ for coming & staying. The hospital reported the $$$ in box 7. Is that correct?

    1. Just to clarify… You said he had to “become an employee”. Did he become an employee or did he sign an agreement to contract his services for the next three years? Employees get a w2, contractors get a 1099-misc with income in box 6.

      Box-6 Medical and health care payments – The standard payment of $600 or more to health care providers like doctors, nurses, hospitals, and corporations is fixed as reporting threshold to use this box-6. Payments to pharmacies for prescription drugs or to insurance companies for premiums paid on fully-insured health coverage are not included here, but payments made by insurance companies to medical service providers are included. Where charges include both goods and services, hence have to report the entire payment by using Box-6.Here the goods mean the pharmaceutical products like vaccines for viral fever and the services are through doctors and nurses who use these products to administer the patients.

  44. My wife received 3560 in finder’s fees for a friend’s grant writing business. She received a 1099MISC, with that amount in box 7, and zero in Federal Tax withheld.
    So I entered it like this, and the tax software I’m using (eSmart Tax), says my risk of an audit is high, with the messge “There is only income reported on the Schedule C”.
    Any insight onto this?

    1. Hi Todd. You are correct in inputting this amount on a Schd C with no federal tax deducted. The software sometimes alerts when there is no need. Schd Cs have a higher audit rate quite naturally just because taxpayers are able to deduct business expenses s to it in ways that are not possible with w2 income. In her case there’s nothing to be alarmed about because she probably has no deductions anyway. I hope this helps 🙂

  45. Pingback: Did You Pay Anyone More Than $600 in 2018? — Get your 1099-misc filed by 1/31 | My Walk Tax Time

  46. Hello,
    This is a hypothetical question:
    Let’s say someone received a ($1200) dollars in a legal settlement for pain and suffering in a wrongful termination lawsuit. The former employee did suffer a back injury at work. Does the I.R.S require that such settlement amount be reported? Is it even taxable? And if yes, what box on the tax form should that amount be reported? (3 or 7). Also, should a worker compensation lump sum settlement for medical be reported as well?

  47. I filed my 2017 federal last year and just recently I realized after looking over it I had used the amount on my 1099 in line 7 as if it were reported on line 3 instead. how do I correct this?

  48. Hello,

    My daughter who is a fulltime student received a stipend for $1200 from a non-profit organization towards her education for completing her semester with all A’s. In January, she received a 1099-MISC with box 7 checked off. Is this correct??

  49. I have a question about 1099-misc income. I run a “business” that is repetitive year to year but not designed to make a profit. I bought a truck personally, and receive a stipend from my company to pay for the bank note, a set of tires, and basic maintenance each year. The income is placed in Box 7 and I claim the income and expenses. This year turbotax said that “I do not meet the requirement to pay SE tax” however the IRS sent a letter saying the $3,351 on line 29, schedule 6 indicates I may be liable for SE Tax. This is the 3rd year of this arrangement and the forst time I’ve been contacted by the IRS. It says in te letter I have the option to send a letter back providing and explanation of why I am not liable for the SE Tax. Can you comment with your opinion on this? The actual amount of money I received is $7,200.00. Thanks

    1. Hello Brad. I hate to say this, but it sounds like you have a couple different things going on. I don’t have enough of the right information to tell you with full certainty, but I will point out a few things: (1) You cannot have a business that year-after-year makes no profit. The IRS will reclassify that business as a hobby. If you’re on year 3, you may have be on the verge of being reclassified. (2) Schedule 6 has to do with foreign addresses (not SE Tax), and it does not have a line 29 (see https://www.irs.gov/pub/irs-dft/f1040s6–dft.pdf); (3) Line 29 on Schedule 1 is for Self Employed Health Insurance deduction, which if you attempted to apply to your situation, would be disallowed because you don’t qualify for it. You have to have a net profit in order to take this deduction. — Some of the other details you mention about a “stipend” to pay truck expenses would not go over well with the IRS, so I think you may be skating on some thin ice here. You may want to allow a tax professional who understand the ever-changing tax law to assist you. I hope this helps.

      1. I agree there are several things working here. The IRS letter I received says Line 29 Schedule 6, which I agree has nothing to do with my situation. Line 29 of the Schedule C does have the $3351 in it that the IRS says I owe SE Tax on. I guess my business isn’t designed to be non-profit, but the way it is set up, I actually lease the truck to my employer and they pay me a monthly lease payment to be technical. The lease payment equals what my yearly note, insurance and maintenance costs are expected to be. When I go through the turbotax section on SE tax, they ask a few questions and tell me “I don’t meet the requirements to be liable for SE Tax” with no explanation of why this is. The 1099-misc has the income in box 7 and my deductions reduce the taxable amount from the $7200 I received down to the $3351 that the IRS says I “May be required to pay SE tax on”. I suppose I need to spend time with turbotax support and follow the program logic with them, and possible get a tax advisor looking into it also. Or just pay the IRS the 15.3% ($512.70) on the $3351 and pay someone to go over it with me next year. The IRS says I either need to explain why I don’t owe the tax or fill out the SE tax form and pay the tax.

        As a separate subject, the same IRS letter says “according to their records, advance payments of the premium tax credit were made for health care coverage from the health insurance marketplace for someone listed on your return” but neither myself nor my wife have had marketplace coverage and I have a 1095-b from my health insurance showing full year coverage. They are requesting I send in my 1095-A and complete form 8962 to reconcile my premium tax credit. I’m not sure how they would get information that doesn’t exist from the marketplace.

        Thanks again for your input.

        1. Sounds like you need to do an amendment. You don’t need to input anything from your 1095b this year. You only need to check the box(es) showing that everyone had coverage. — The business vehicle situation is more challenging. I’d need to actually see the tax return. If you’re interested, I can send you a link where you can upload your full tax return (as in every page of it) so I can take a look. My fee for consultations is $30 per 20 minutes, and fees must be prepaid. I’m initial look at your tax return would be equal to one 20-minute appointment and my response to you would be in written form. I should be able to tell you what needs changing on your tax return, but because I do not use TurboTax, I would not be able to tell you how to do it within TurboTax. If you want me to amend your taxes for you, the cost would be for the full tax return (whatever that may be) + $50.00. In that case, I would credit you back the $30 paid for the consultation. All communications would be virtual, withing a my Box.com cloud collaboration application. If you’d like to do this, just let me know and I will send you an invitation to collaborate with me via box.com. — Thanks a bunch!

  50. This is a very helpful overview, even 7 years later. I have to say, I cannot wait for the IRS to officially release the 1099-NEC. It’s been a long time coming, especially with the increasing number of people needing to file 1099s. Thank you!

  51. Hello! I operate a consignment shop. Instead of the traditional 50/50 split, I take a smaller percentage plus the consignor pays a fee ( rent) each month that comes out of their sales to have a designated space to consign. I collect payments from buyers, remit sales tax, advertise, pay utilities, staff the shop, etc. then pay out each consignor on a monthly basis. Are consignors supposed to receive a 1099 if they get ore than 600.00 for their items? I was told that because the payments I give them are for merchandise, they should receive a 1099 misc. If they are to receive one, should it be the gross or net amount? And would it be considered “other income” in box 3? Thank you for your insight!

    1. Hi Tianna. Well…. Here’s how I see this situation. YOU as the retailer are actually performing a service (the services of merchandising & selling) for the consignor. — A 1099misc from is provided when you PAY someone to perform a service for you. It appears to me that YOU are performing a service for them, and they’re compensating you 50% of the sale price. So then, I’d say if the consignor purchases underpriced clothes and brings them to you to sell for them, they are in business and should be giving you a 1099 for your services. — And NO not box 3. — Here’s a quote from Chron Small Business “Direct Sales

      If you have contract workers who purchase inventory from your retail store at a reduced price for direct sale to consumers at retail value, you may have to provide additional information on Form 1099-MISC. You must check Box 9 of Form 1099-MISC if an independent sales person purchases more than $5,000 of inventory from your store for the purpose of direct resale.” https://smallbusiness.chron.com/retail-business-should-reported-1099-35089.html

Leave a Reply