1099-Misc Income Treatment Scenarios

The following scenarios address 1099-Misc issues that frequently occur where taxpayers may be unaware of their reporting requirements/responsibilities. Some of the scenarios might erroneously qualify a user for EITC. The intent is to determine if a taxpayer truly has a Schedule C in which the income would then qualify them for the EITC.

Examples include situations where:

  1. Client correctly receives a 1099-Misc but does not understand what it is for
  2. Client correctly receives a 1099-Misc but has no expenses
  3. Client receives a 1099-Misc when they should have received a W-2
  4. Client has not received 1099-Misc but should have received it
  5. Client received 1099-Misc and the income is incorrectly classified

 

The preparer should always ask the client if he/she had any other income that they have not presented to the practitioner.

Form 1099 Scenario 1 

Mia is a 24 year old college student who did some part-time web development work over the summer.

She loved the job because she could do it late in the evening which is the best time for her to get work done. Her boss didn't care when or where she got the work done as long as it was done by a certain date.

She received a 1099-Misc for the $10,000 she earned and doesn't know what it is or what to do with it.

How should Mia report her income?

Since Mia was able to do the work whenever she wanted and wherever she wanted, this is income that she received as an independent contractor, and therefore it should be reported on Schedule C subject to self-employment taxes. She can offset it with any expenses she incurred while doing the work. It would be reasonable to expect that she had business expenses; however, Mia did not keep any records of her expenses related to this activity.

How do you help Mia reconstruct her records?

  • Ask Mia if she incurred any travel expense or drove her car to attend meetings to discuss details related to this work. If she says no then probe on how she worked with the team/group?
  • Did Mia purchase any software for this web development? Print supplies? Computer equipment?
  • Did she use personal equipment primarily for this work? She can claim depreciation but she would need to determine what percentage was used for business and what was used for personal purposes.
  • Consider business use of the home: Mia may not qualify because no one part of the home was used exclusively for business and she could have performed the services at the business location.
  • Probe to determine if she did similar work for other people or organizations? Does her total income lead you to believe that it was enough to support her?
  • Explain to Mia that it is her responsibility to maintain good records of her income and expenses.

 

1099-Misc Scenario 2

Consuelo worked as a maid in a hotel. She received a 1099-Misc with income earned doing this work. She is required to work set hours at her employer's business location. She uses equipment and supplies that are provided by the employer. Based on the facts, Consuelo should be classified as an employee and should receive a W-2.

 

 How should Consuelo report her income?

1099-Misc should be reported on a Schedule C. She may not reasonably have any expenses. However you should probe to determine if this is correct. Establishing a conversation about the type of work she performed may lead you to a different conclusion.

As the preparer you should ask sufficient questions to determine she has no other jobs or expenses and document the conversation and reasons for your classification of her employment type (employee or Schedule C).

1009 Misc Scenario 3

James is a college student who worked as an intern during the school year. He was required to report to the office on the days that he worked and his boss would give him a list of items to be accomplished that day. The working environment was very positive in that James basically worked side-by-side with his boss, learning all that he could. James received a form 1099-Misc for the income he earned doing this work.

How should James report his income?

James should file his return with a Schedule C with the 1099-Misc amount as income, this will avoid any penalties from late filing or taxes owed. Since James went to the office and his boss controlled when and how he did his work James should have received a W-2 for the work performed. He could then file a Form SS-8 Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. The IRS will then follow up with the employer to determine if James should have been treated as an employee. If James receives a notice of determination from IRS indicating that he should have been an employee, James can file an amended return to correct his original filing.

As the preparer you should ask enough questions to determine James should have been treated as an employee and has no expenses.

1099-Misc Scenario 4

Henry tells you that he received payment in 2010 for work done on a contractor basis, however the company has yet to send a 1099-Misc and it's now early April.

How should Henry report his income?

Henry should file his return with a Schedule C including the amounts that were paid to him by this company. The fact that a 1099-Misc was not issued does not mean that the income does not have to be reported.

If needed you should help Henry to reconstruct his income and determine what allowable expenses he has to report for this business.

1099-Misc Scenario 5 

Mary won a prize from a local community sponsored activity. She received a Form 1099-Misc with the prize amount reflected in Box 7 as "Nonemployee Compensation". Upon reading the instructions for Form 1099-Misc she sees that the amount should have been correctly reported in Box 3 "Other Income" and is not subject to self-employment tax because she did not "earn" the income.

How should Mary report her income?

Before filing her return, Mary should contact the entity that sent her the 1099-Misc and ask them to file a corrected Form 1099-Misc with the amount correctly reflected in Box 3 instead of Box 7. Among other tax implications, reporting the amount on the Schedule C might inadvertently qualify her to take the EITC when it is obvious that this is not earned income and should not be included in the calculation for qualification of EITC. In addition reporting the income on Schedule C would require Mary to pay self-employment that she doesn't owe.

 

Return to the Schedule C Training and Record Reconstruction page.

 

Last updated: 2/23/11

Page Last Reviewed or Updated: 26-Sep-2013