Do I Need to Correct This Tax Form?

February 10, 2021 5:31 AM

US Tax question: I received a 1099-MISC for a payment that I had to send back. Do I still need the 1099 for filing taxes? More details below.

In December, my employer sent me a check that wasn't intended for me, and I just received its corresponding 1099-MISC last week.

Basically, in December, my employer sent me someone else's money. My name was on the original check, but funds were improperly allocated and I had to give it back. I deposited the check when I received it, only to have to write my employer a check back for the balance. In case its important, this mistaken payment was the only "income" I have from this particular employer in 2020. My earnings from them are $0. I am an independent contractor.

Now it's tax time. Since I deposited the initial wrong check, do I need the 1099-MISC for it? Should I request a new form reflecting effectively earning $0 from my employer?

Thanks for any help, I'm having a hard time wrapping my head around this.

posted by Guess What to Law & Government (12 answers total)

So the problem here is the employer also sends a copy of that 1099 to the IRS. According to the irs you made that money. While unlikely, you could get an audit for not reporting the income.

You have two options:

1. Ask your employer to issue a corrected 1099. It is a pain in the butt. You may have to be persistent.

2. Report both the 1099 revenue and the expense of the check to pay back your employer leaving you with $0 net reported income. On your taxes you do this using a schedule C. That is how freelancers report their earnings: you report your income but also your expenses for your business, and only the profit left after revenue minus -expenses is taxable income.
posted by sol at 5:48 AM on February 10, 2021

Did you send the check back to the employer in 2020 or 2021?
posted by saeculorum at 6:52 AM on February 10, 2021

It is not always an audit when you don’t report the income on a form like this. Sometimes it is just a letter that says hey we think you filed wrong and now you you owe us X more. Sometimes the state finds it first and sometimes the feds. Either way, you do want to include it and the expense of returning it so they don’t just take what they think you owe or force you to file another form. Even if you paid this back in 2021, it is an expense related to this income, so you should read up on how to include it in your return. It may be worth paying someone to file for you this year.
posted by soelo at 7:13 AM on February 10, 2021

Saeculorum, I sent the check back to the employer in December 2020.
posted by Guess What at 7:14 AM on February 10, 2021

Your employer has sent an incorrect 1099. The IRS's computers will note any discrepancy. It will be easier to remind the employer of the error and request a corrected 1099.
posted by theora55 at 7:35 AM on February 10, 2021

Concur with @theora55

If they received the check in December 2020, then your 1099 is incorrect. Get it corrected. Else IRS will count it against you.
posted by kschang at 7:53 AM on February 10, 2021

Yep, you definitely need a corrected 1099 since there was no net income given to you in 2020. If you don't get it corrected, the IRS will notice the employer counting a 1099 expense (for the employer) for no money expended - this is an incorrect deduction for the employer. The 1099 is defective on the employer's side and needs to be resolved.

If you counted this as an expense (it isn't), you'd also have to issue a 1099 back to the employer for the "income" you gave them. That should give you a sense of why that approach is incorrect.
posted by saeculorum at 8:00 AM on February 10, 2021

I'm a freelancer who deals with 1099s a lot, and I agree that it's easiest to tell the employer they made a mistake and they need to correct it on their end.

But also agreeing that the type of response you might get from the IRS at some point is what soelo says: "We see a discrepancy; please explain." And that's not a big deal to handle if it comes to that.
posted by BlahLaLa at 10:17 AM on February 10, 2021

I'm a freelancer as well.

I would ask them to fix it first, and if that doesn't happen / it's a PITA, I probably wouldn't think twice about just deducting the 'refund' you sent (I assume you have a receipt like a check or whatever & you're already itemizing deductions).

Yeah it's a mistake, but it's a mistake on your client's end. If they don't fix it in a timely fashion, file your taxes with whatever documentation you have. As noted by others, this situation is common (I've had 1099s get lost in the mail, sent to wrong addresses, or the client just never filed it) and if the IRS notices a discrepancy you'll just get an auto-letter saying basically "We did the math and you probably owe $X because of this 1099". Not a big deal, you either pay what they ask or send in updated documentation.

Unless this is a massive amount of money I wouldn't sweat it.
posted by bradbane at 10:43 AM on February 10, 2021

Are you already filing a Schedule C for your consulting business or this the only 1099 income that you have? If you do file a schedule C, you want to make sure that your schedule C income is equal to or greater than all of your 1099s.
posted by metahawk at 11:02 AM on February 10, 2021

First off, starting in 2020, contractor payments are supposed to be reported on 1099-NEC (non-employee compensation), not on 1099-MISC. It's probably not a big deal because some employers may still use the old 1099-MISC. This won't make a difference to you as long as you report the income on the form. The incorrect report is the employers problem, not yours, and will make no difference to your income report since either MISC or NEC goes on the same line 1 of Schedule C.

In your case you should ask your employer to issue a corrected form. The box on the top should be checked for "Corrected."

If your employer doesn't issue a corrected form, don't just ignore it. You are very likely to get a letter from the IRS asking about it if income you report on line 1 of Schedule C is less the sum of all 1099s you are issued.

Here are the instructions from the IRS for Schedule C, page C-5 Line 1:
If you received one or more Forms 1099-NEC, be sure line 1 includes amounts properly shown on your Forms 1099-NEC. If the total amounts that were reported in box 1 of Forms 1099-NEC are more than the total you are reporting on line 1, attach a statement explaining the difference.

So if you do not get a corrected Form 1099-NEC or 1099-MISC, you need to attach a very short statement saying 1099 issued was in error. Attaching a statement may require printing out your tax return to attach the statement. But, for example, in TurboTax you can switch to Forms Mode, pull up your Schedule C and next to line 1 you will see a button to "Explain" next to “Income less than 1099-MISC box 7 explanation." This will pop up a text box to create an attachment.

It doesn't have to be a long winded explanation. If the numbers do not match, a computer is going to flag it and a human will look at it. If you have an explanation, any kind of explanation, the human will likely just chalk it up to an error and pass.
posted by JackFlash at 11:12 AM on February 10, 2021

Thanks everyone, I marked everything as "best" because you all had good insight! 2020 is only my 2nd year doing freelance work, you all pointed me in the right direction. I'll request a corrected 1099 from my employer and see if that gets me anywhere.
posted by Guess What at 4:30 AM on February 11, 2021