If you receive a 1099MISC document in the mail, and there’s a dollar amount listed in box 7 for Non-employee compensation, the IRS treats that as self-employment income and you’re supposed to pay self-employment tax on that income. If you own your own business, that’s perfectly normal. By the way, I’ve got lots of blog posts and tax tips for self-employed folks on this web-site so be sure to check those out. I’ve got a list at the bottom.
But what if you’re not self employed? Really not self-employed. You’re stuck with a document that basically requires you to pay extra tax, what do you do?
First, only dollar amounts in box 7—count as non-employee compensation. If you received dollar amounts in box 1 for rents or box 3 “other income” you don’t have to worry about the extra self-employment tax. The rent goes on your Schedule E for rental income and the other goes on line 21 of your 1040.
But let’s get back to that non-employee compensation again. What did you do to earn that money? Is it in your field of work? If the answer is yes, then it’s going to count as self-employment income even if you don’t think of yourself as being self-employed.
I’m going to use my friend Rick as an example. He works for another tax company and he’s very good at what he does. Every year, Rick gets laid off on April 15th. My company stays open all year round and sometimes I’m super busy in September and October. I could probably use some extra help around then. If I hired Rick to help me with some tax returns, I’d give him a 1099MISC for the money I paid him and he’d have to report that as self employment income. Even though Rick normally works for another company, he’s still in the business of preparing taxes. The money I pay him for tax prep would definitely be considered self-employment income.
But let’s say I hire Rick to paint my office instead. Rick’s not a painter, he doesn’t do that as a business, he’s just helping me out because I need my office painted and I’m helping him out because he needs the money. We’re friends. Painting is not his line of work. So technically, he’s not self-employed and he shouldn’t have to pay self-employment tax on that income. It’s a one shot deal never to happen again. How do you account for that?
Well, it used to be that if you received a 1099MISC for non-employee compensation for under $1000 and you put that amount on line 21 of your 1040—the IRS would let that slide and not audit for self employment tax. But starting with 2013 tax returns, the IRS has announced that they will send notices to anyone with 1099MISC income (with non-employee compensation) on line 21 instead of putting it on a Schedule C—where it will be taxed with self-employment tax.
There’s no box to check or form to fill out with your 1040 to say, “Hey, I’m not self-employed! I shouldn’t have to pay self-employment tax!” So what do you do?
You’ve basically got two options:
One: Claim the income as business income and write off any and all expenses associated with the job. This is going to be the best choice for people who have expenses with a job like mileage or supplies.
Or, two: File your 1040, pay the self employment tax, and then file an amended return 1040X taking the income out of self employment and putting it on line 21 with the explanation that you are not self-employed and the income should not have been subject to self employment tax.
Why do this as an amendment instead of doing it that way the first time? Because the IRS has already announced that they are sending letters out to anyone who puts 1099MISC for non-employee compensation income on line 21. And they charge fines and penalties for underreporting your tax.
By filing and paying the self-employment tax first, then amending, you’re giving the IRS the opportunity to examine the situation and make a determination. You may win, you may lose. But if you win—the case is closed and they won’t come back at you. If you lose—it doesn’t matter. You already paid the tax and they can’t fault you. No harm, no foul.
Most people who receive a 1099MISC for non-employee compensation are going to be considered self-employed by IRS standards. You may as well file the schedule C with your tax return and pay the self-employment tax. If you think you might be an exception give us a call, we can help you sort out your options.
Hi Martin,
Wow – I didn’t even go to the “merchandise” idea. Wow. But since you spoke with someone at the IRS and they said no to the business – then I would go with reporting it on line 21.
That said – document your conversation. Write down the name and ID number (if you still have it) and put it with your records – just in case anyone from the IRS comes back at you with this in the future.
Oh, and thank you for your service! I think there must be a special place in heaven for people who give so generously to children in need. I know the $1 an ounce in no way comes anywhere near to the value that you’re providing.
Wow – Thank you for the fast reply (I wasn’t sure if I would get an answer) – Thank You. My question is legit, and yes it is a shared email account.
Could I ask another question or 2 on this topic?
I called the IRS Customer Support and asked for their view of this. They said that Breast Milk is not reportable. Breast Milk is considered merchandise, and the company that is paying me $1.00/ounce for the product should not be issuing me a 1099-MISC for these payments. Establishing a business (self-employed) to produce or sell Breast Milk wouldn’t be a recognized business as the volume produced and duration is uncertain.
I also checked the IRS definition for self-employment Income – “profit must be your motive”.
There is no motive for profit for my donations of the excess breast milk I produce (my motive is to help the premature babies and their mothers in NICU that have no milk – as I was in this position with a preemie).
I used this basis to report the income I received and that was reported on 1099-MISC as Line 21 “Other Income” to pay taxes on this money, but not expecting it to be viewed as I am self-employed?
Hi Martin,
Um….. you’re donating breast milk? Sorry, I’ve just never met a woman named Martin or a man who donated breast milk. I’m going to assume that you’re either using a shared email account or asking for a friend and that your question is legit.
Wow – the things that get taxed!
So if you go to the IRS Pub 17 – that has the rules about taxable income, it doesn’t say anything about taxing breast milk. (I really did look, just in case.) So we have to go to the courts to see how it would be interpreted. That brings me to the Perez v Commissioner of Internal Revenue case. It was settled in 2015. I did a post about that awhile back. Perez case.
In the Perez case, the bottom line was that donating a woman’s eggs was taxable. And although the case didn’t specifically state that the income was self employment income, the language of the case pretty clearly indicated that it was self employment income.
Which this sounds totally nuts right? But it’s in line with the ruling.
So, I’d put it down as self employment, and I’d make sure you write off all of your expenses – breast pumps, storage containers, nursing bras, laundry, vitamins – whatever you spend to make sure that you can still provide breast milk for the “business”.
I hate this answer. But that’s what I’d do. But I also suspect that if you asked someone else, they’d just say – line 21. I think you could make a good argument for it. But me personally, I lean towards the schedule C.
Donation of Human Breast Milk (not considered an employee of the company I donate to). They pay me $1.00/ounce for my “time and effort” (however, payment is based on the volume). They issued me a 1099-MISC reported on line 7 (non employee compensation).
I do not do this as a business and have no motive to make a profit. My only motivation is to help mother’s and pre-mature babies that have no milk source.
Am I correct to report this on my 1040 Line 21 as income that I pay normal taxes on (rather than on Schedule C, as self employed income)?
Hi Faithe,
Sorry but if you’re working and receiving a 1099MISC, even if it’s from a non-profit, you’re considered to be self-employed. You will be subject to self-employment taxes.
Hi Kate,
If you’re receiving 1099MISC then you’re considered to be self-employed. You’re right, you should amend your tax return. Here’s a link that might help:
Amending Return
Hi Rob,
You’ve got it! One thing about claiming the mileage to the game, that’s a commuting expense unless you have a home office. Which – I’m assuming that your son does, because he needs a spot to stash his equipment. Even if it’s just a 5 x 5 space in the corner of his bedroom. No fancy deduction, just do the safe harbor thing where he gets $5 a square foot. Not a big deduction, but it legitimizes the mileage he gets to claim.
Hi Gloria,
Well, it seemed like he worked for free, but he evidently got $1600 for it. I’d put it on a Schedule C and write off all of his related expenses.
Hi Dave,
I am answering this too late for your 2017 taxes. But – if this is going to happen again, yes you can!
Hi Lee,
You got me. If he were an employee, then his healthcare would not be taxable. If he were a retired public safety officer, then part of his health insurance would not be taxable. But I agree with you, his health insurance should not be subject to self employment tax. At least, that’s my opinion on that. I can’t find anything to contradict me, but I’m not finding anything to back me up either.
I would think that the pension would have included the health care payment as income on the 1099R. That’s where I think it belongs. That would be my first choice. If they won’t fix that, I’d file the 1099, but put the amount on line 21 of the 1040 adding a statement that its for a health insurance reimbursement, not for self employment.
If the IRS disagrees, go ahead and file it on the Schedule C – but then claim a deduction for the self employed health insurance expense – since you’re paying tax on it. But I really think it should have been on the 1099R instead. But maybe there’s just something there that I don’t know.
Hi Chad,
The 1099MISC requires you to file as self employed, so that’s a more complicated return. I’ve got a File Your Own Taxes Online site also. It’s a little less than Turbo Tax, but not much. And, if I prepare a self employment tax return, my prices start at $600. So, suddenly the $59 or whatever Turbo Tax charges doesn’t seem all that high.
Hi Chad,
Sorry I’m responding so late, I’m pretty busy in April and just now catching up.
Often, companies have a dba “doing business as” name. So while you worked for Beekcake Burgers, the real company name is New Beginnings Restaurant Group. That’s pretty normal.
Since they closed down, and you do not feel that you were self employed, I would file form SS8. It’s kind of a pain in the butt, but that’s your showing the IRS that you were an employee, not contract labor.
But there’s no guarantee that you’ll win. So you’ll want to be prepared to file as self employed if the IRS goes against you.
Hi David,
You win! Yes, that’s interesting! My personal opinion on this is that the school should not issue a 1099MISC for an employee benefit. I think they’re in the wrong here.
My guess, is that they don’t have an official tuition reimbursement program so they scrambled and came up with the 1099MISC. But I’m just guessing. Or maybe I’m not understanding everything. She got the tuition reimbursement from the public school board – but she works for the Catholic school – so I can see here that she couldn’t receive an employee benefit as she’s not a public school employee. That would explain the 1099 a little better.
So what do you do? I’d file the Schedule C and I’d claim the tuition paid as a business expense. It’s legit, she has to get that training.
Hi Linda,
I want to make sure I’m understanding this correctly, your brother’s life partner died, not his business partner right? That’s how I’m reading the question, and that’s how I’m answering it, as a business partner issue would be a different answer.
So the company paid to your brother the equivalent of his partner’s wages, so technically that would be subject to self employment tax even though your brother never worked there.
Now, the think that comes to mind to me is that they could have paid his partner a year’s salary after death – that would come on a 1099 MISC with the amount in box 3 – that’s how you pay wages after death – BUT – that would have gone to the partner’s estate- and not necessarily to your brother. So – I’m thinking that the partner set this up as a protection for your brother. Even though the self employment tax must be paid, it was probably the best way to handle that.
I would think that the stock liquidation would have come on a 1099B instead of a 1099MISC. But once again, I’m not working will all of the details. When the partner died – who owned that stock? There should be basis and I would think that there’s a capital gain instead of self employment tax. But I could be wrong there. There may be some details that are just not available to me. So while I think the salary is probably okay in box 7, I’d look into the stock and got more details on that before filing.
Hi Arnab,
Your daughter is considered to be self employed. She will not be able to avoid the self employment tax. The best thing she can do is claim deductions for any expenses that she had for working at the internship.
I realize that $59 seems pretty high for software, but just for reference, my starting price for a self-employment tax return is $600. I’m not the cheapest tax person, but I’m also not the most expensive. Here’s a link to my do it yourself site: Do Your Own Taxes Online It costs less than Turbo Tax, but adding the state tax return costs extra.
Hi Crystal,
The award was listed in box 3 so you will put that amount on line 21 of your federal 1040 tax return. There will be no self-employment tax on that.
Hi Blanca,
I don’t know all of the details for the payment, but I’m guessing that since the payment was put in box 7 – your employer must consider that the company winning the lawsuit was in some part related to you and work that you had done. Which normally I would think it would be put on a W2 – but perhaps it was for something that you had done in a prior year? Or maybe your employer was sharing a windfall? I honestly don’t know. But, since it was in box 7 – I would report it as self employment – unless there is something you can point to that shows it should have been in box 3.
For example: punitive damages in a lawsuit are put in box 3. That would be a good example. But most other scenarios I’m thinking would be a box 7 type item.
Hi Kristin,
Well, you could report your employer to your state’s Division of Employment Security – but if you do that, be prepared to be unemployed. You could file form SS8 with the IRS, and once again, you can expect to be unemployed.
So, the choice is yours. But perhaps it’s best to have a frank, non-threatening discussion with your employer about the situation. If you’re working for a theatre, they may just be barely making ends meet. Here’s one thing – usually, if you switch to W2 from 1099 – your pay goes down to cover the cost of the employee taxes.
Hi Maura,
The way it’s written in the IRS instructions is that Box 3 is for “prizes and awards” that are not for services performed. It sounds to me like the vendor is paying a bonus for each of their cabinets that your husband has sold – so it’s technically a service that he has performed. I’m thinking box 7 is legit. But, your husband should be writing off his expenses (if he has any) for selling those cabinets.
Hi Rhonda,
I would claim that income as self employment. It sounds like the 1099 wasn’t done correctly, but he worked for the company, he got a 1099 – and even though it was wrong, I’d still claim it as self employment income. I’d also write off all of his expenses against that income–like his mileage.
Hi Melissa,
I’m afraid that the 1099 with the amount in box 7 is correct. If your husband is teaching – then he is working. That makes him self-employed. Sorry.
Hi Tabby,
Sadly, yes. Your daughter will need to file as self employed. I think it’s terrible that they did that to her, but that’s the situation.
Hi Chuck,
I agree with you. I think that you should not be considered to be self employed just because you referred a customer to a business. And actually, since the referral was put in box 3 – then you aren’t considered as self employed. You just put that income on line 21 of your 1040. You do not pay self employment tax on it.
Hi Andy,
Thank you for the service that you do for your community. Since the church chose to count their “gift” as taxable income to you, and it winds up helping your family, I say amend your tax return, take the tax credit and be happy. No guilt. Besides, I suspect that a little extra money in your pocket will wind up helping some needy teenager anyway, so the church is getting a double bonus on what it paid you. That’s what I call a win/win situation.