Tis the season for tax questions!
February 12, 2021 10:30 AM Subscribe
I received a large sum of money last year, but it wasn't for any work I did/products I sold/services I provided. The company that paid me issued me a 1099-NEC, but I think it probably should be a 1099-MISC. Do I need the company to reissue the 1099? Even if they do correct the 1099 am I going to get audited regardless?
My husband died last year. He was employed at his regular salary up until his death, and after his death his employer offered me a substantial sum of money, around 1/2 of my husband's annual salary. This was not an insurance payment, it was just money they gave me, I guess because they wanted to be nice. I accepted it and didn't ask a lot of questions! They said they'd send me a 1099, and I made an estimated tax payment based on a rough back-of-the-envelope calculation. I was expecting a 1099-MISC but I got a 1099-NEC, which I had never heard of before (I think it is kind of the "gig economy" 1099).
Now that I'm actually filing my taxes, though, the NEC doesn't really seem to make sense - all the forms and software ask you what kind of business you were doing in order to earn this money, which doesn't seem to make sense here since I did no work for the company; I suppose you could argue that it was some kind of compensation for my late husband but given that he was receiving his full salary up until his death that doesn't seem right either (plus check and the 1099 are in my name). There is an option for "hobby income" but I assume saying like 1/4 of our income for the year was from a "hobby" would trigger alarm bells.
Perhaps unsurprisingly I'm having trouble finding guidance on how to handle random lump sum gifts from corporations. I know on a 1099-MISC there are options like "prizes" and "other income" that seem like they would make more sense.
I'm a little reluctant to ask the company to reissue the 1099 because they've already been really good to me and because my main contact at the company doesn't seem to have a ton of knowledge about tax stuff, so if I'm going to ask her for something I'd like to be very clear about what I'm asking. I expect to pay income tax on this money, but I wasn't expecting to have to pay self-employment tax (for instance I once won money on a game show and I didn't have to pay self-employment tax on that, and that seems much closer to being a payment for work than this is).
I can afford to consult a tax professional, but if they're just going to tell me, "ask the company to reissue the 1099 and document everything in case you get audited" I feel pretty confident I can do that myself.
To sum up: I 100% understand that I owe regular income tax at my marginal rate on this money, I'm really only asking about how it should be documented and whether there's any way I owe self-employment tax.
Do I need to get them to issue me a 1099-MISC instead? Or should I be paying self-employment tax on this money? Or can I just call this "hobby income"? What do I do if the company can't or won't reissue the 1099?
My husband died last year. He was employed at his regular salary up until his death, and after his death his employer offered me a substantial sum of money, around 1/2 of my husband's annual salary. This was not an insurance payment, it was just money they gave me, I guess because they wanted to be nice. I accepted it and didn't ask a lot of questions! They said they'd send me a 1099, and I made an estimated tax payment based on a rough back-of-the-envelope calculation. I was expecting a 1099-MISC but I got a 1099-NEC, which I had never heard of before (I think it is kind of the "gig economy" 1099).
Now that I'm actually filing my taxes, though, the NEC doesn't really seem to make sense - all the forms and software ask you what kind of business you were doing in order to earn this money, which doesn't seem to make sense here since I did no work for the company; I suppose you could argue that it was some kind of compensation for my late husband but given that he was receiving his full salary up until his death that doesn't seem right either (plus check and the 1099 are in my name). There is an option for "hobby income" but I assume saying like 1/4 of our income for the year was from a "hobby" would trigger alarm bells.
Perhaps unsurprisingly I'm having trouble finding guidance on how to handle random lump sum gifts from corporations. I know on a 1099-MISC there are options like "prizes" and "other income" that seem like they would make more sense.
I'm a little reluctant to ask the company to reissue the 1099 because they've already been really good to me and because my main contact at the company doesn't seem to have a ton of knowledge about tax stuff, so if I'm going to ask her for something I'd like to be very clear about what I'm asking. I expect to pay income tax on this money, but I wasn't expecting to have to pay self-employment tax (for instance I once won money on a game show and I didn't have to pay self-employment tax on that, and that seems much closer to being a payment for work than this is).
I can afford to consult a tax professional, but if they're just going to tell me, "ask the company to reissue the 1099 and document everything in case you get audited" I feel pretty confident I can do that myself.
To sum up: I 100% understand that I owe regular income tax at my marginal rate on this money, I'm really only asking about how it should be documented and whether there's any way I owe self-employment tax.
Do I need to get them to issue me a 1099-MISC instead? Or should I be paying self-employment tax on this money? Or can I just call this "hobby income"? What do I do if the company can't or won't reissue the 1099?
Best answer: For maybe helpful context, the IRS changed the filing rules for 2020, so non-employee compensation (paid to many non-gig-economy freelancers, but they’d probably be lumped in there, too) got moved to the revived 1099-NEC, where it would have previously been reported on the 1099-MISC, box 7. It made reporting a little more tedious than usual as many existing records had to be updated, and I can definitely see how someone would have just taken a stab at how to classify an unusual payment like this appropriately.
Anyway, I agree that this income should have been on a 1099-MISC, probably box 3. It should not be a big deal for the company to issue a corrected 1099 if you ask! I’m not a CPA, but I process 1099s for my employer, and every year we have to issue a handful of corrections. It’s easy, so go into it assuming it’ll be a simple ask!
And I’m so sorry for your loss. I hope this is resolved quickly for you.
posted by circle at 11:23 AM on February 12, 2021 [2 favorites]
Anyway, I agree that this income should have been on a 1099-MISC, probably box 3. It should not be a big deal for the company to issue a corrected 1099 if you ask! I’m not a CPA, but I process 1099s for my employer, and every year we have to issue a handful of corrections. It’s easy, so go into it assuming it’ll be a simple ask!
And I’m so sorry for your loss. I hope this is resolved quickly for you.
posted by circle at 11:23 AM on February 12, 2021 [2 favorites]
I'm a freelancer so I deal with multiple 1099s each year, with many opportunities for error. Just FYI, when the IRS has a question about something like this, it doesn't jump straight to audit. This is in the territory of them sending you a letter saying "You called it MISC but the employer called it NEC, please clarify" which then can be resolved by mailing an explanation to them and/or the employer reissuing a corrected 1099 at that point. (Which definitely has happened to me more than once.)
posted by BlahLaLa at 11:36 AM on February 12, 2021
posted by BlahLaLa at 11:36 AM on February 12, 2021
The 1099-NEC is for reporting compensation to non-employees, which actually seems to suit your situation very well, so the form you have may very well be correct. The differentiation between the 1099-NEC and the 1099-MISC is new for TY2020, though, so people are still trying to figure it out and software may also not be up to date. Do you have an accountant? This is literally the exact kind of question you should ask them. You can also try calling the IRS and asking them. If you don't have an accountant and don't want to call, then I would report based on the 1099-NEC (as it is).
I actually am an accountant, but am still working on my license and won't be a CPA for another few months. Also, I don't know the whole picture of your taxes, yadda yadda yadda.
posted by rue72 at 11:50 AM on February 12, 2021
I actually am an accountant, but am still working on my license and won't be a CPA for another few months. Also, I don't know the whole picture of your taxes, yadda yadda yadda.
posted by rue72 at 11:50 AM on February 12, 2021
Since the income is not related to any wages or services, why isn't it simply a gift? Some years ago, a friend died and left me the two months salary which was part of his benefit package for survivors, not formally life insurance. The IRS challenged me, but I prevailed by insisting that any benefit due to death is not taxable. (I have no tax education whatsoever.)
posted by namret at 4:27 PM on February 12, 2021
posted by namret at 4:27 PM on February 12, 2021
Response by poster: Thanks, all! I will ask them if they can send a corrected form and muddle through.
posted by mskyle at 3:47 PM on February 14, 2021
posted by mskyle at 3:47 PM on February 14, 2021
This thread is closed to new comments.
Document everything. You may have to attach an explanatory letter to your tax return if they won't clarify the situation on their end.
IANA CPA or any kind of tax professional.
posted by JimN2TAW at 10:56 AM on February 12, 2021 [1 favorite]