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…

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

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