How to Report 1099-MISC Box 3 Payments on Your 1040 for Tax Year 2020
Some 1099-MISC income is not subject to FICA taxes
Calendar year 2021 heralds another tax code change, joining several brought about by the Tax Cuts and Jobs Act (TCJA) in 2018.
Those making payments to non-employees must issue the newly introduced Form 1099-NEC to non-employees and independent contractors, rather than Form 1099-MISC, but Form 1099-MISC is still alive and well. It now reports other sources of 2020 income, including the vague-sounding “Other Income.”
You get to keep more of your money if it's reported in Box 3 of the 2020 1099-MISC form because it's not subject to FICA taxes, which are the combination of Social Security and Medicare—also referred to as “self-employment taxes” for independent contractors.
Incentive Payments in Box 3
“Other Income" from Box 3 of the 1099-MISC form includes what the Internal Revenue Service (IRS) calls “incentive payments.” They’re most commonly found in the auto industry as bonuses paid to salespersons when they sell a certain vehicle, and they can really add up over the course of the year.
These incentive payments are generally paid by the manufacturer, not the dealership, and are not wages, salary, or payment for services. This status is true even if the manufacturer remits the incentive to the dealership and the dealership then hands the money over to the salesperson. The payment would appear on the salesperson’s W-2 and this bonus would be taxed just like regular earnings if the dealership were to pay it out of its own funds.
Incentive payments are still taxable income and must still be included on Schedule 1 of the 2020 Form 1040—the return you'll file in 2021. But they're not taxed in quite the same way as earnings that appear in Box 1 of Form 1099-NEC, "Nonemployee Compensation." This distinction is why you get to keep more of the money.
Other Types of Box 3 Income
Box 3 isn’t limited to auto salespersons, although they often reap the benefit of having some of their income reported here. "Other Income" that’s reported in Box 3 also includes any sources that don't neatly fit anywhere else on the form, including:
- Prizes and awards
- Payment you received for serving jury duty
- Taxable damages received in a lawsuit
This list is not exhaustive. Basically, Box 3 reports any income you receive from an endeavor that you didn’t engage in for profit, and that’s admittedly a gray area. Automotive salespersons certainly work to earn a living, but they work for and are under the control of the dealership, not the manufacturer directly, and therein lies the loophole.
Prizes and awards only fall into this category if you did not place a wager to reap the winnings. For example, the car's fair market value would be reported as Other Income in Box 3 if you won a brand-new BMW by participating on a game show, but not if you won it in a raffle for which you bought a ticket. In that case, it's gambling winnings, which are reported on Schedule 1.
The Tax Advantage of Box 3
Form 1099-MISC’s Box 3 “Other Income” items are subject to income tax, but they are not subject to FICA taxes—Social Security and Medicare—or to the federal unemployment tax. This is the important distinction.
This Other Income is not subject to federal withholding, either, but this doesn't mean you won't have to pay income tax on the amount eventually. Taxes just won't be withheld at the time you receive payment.
This FICA tax waiver built in to Box 3 Other Income is why you get to keep more of the money.
How to Report 1099-MISC Box 3 Income
Incentive payments and other types of income that appear in Box 3 are reported on Line 8 of Schedule 1 that’s submitted with the 2020 Form 1040. You would then enter the total amount of other income as calculated on Schedule 1 on Line 8 of Form 1040.
Entering the total on Line 8 separates it from any wages or salary you earned, which are entered on Line 1 of the 2020 Form 1040. This also separates it from self-employment earnings that are calculated on Schedule C, then also reported on Schedule 1. This tells the IRS that this money isn't subject to Social Security or Medicare tax because it wasn't salary, wages, or self-employment income.
There was no Schedule 1 for tax years 2017 and earlier, and the Form 1040 and Schedule 1 have changed in other ways since the 2018 tax year.
Can You Deduct Expenses From Other Income?
Unfortunately, you can’t deduct work-related expenses from your other income, even if it’s an automotive manufacturer’s incentive payment. Through 2017, you could claim work-related expenses if you itemized your deductions, but these expenses were among those eliminated by the TCJA effective from 2018 through 2025.
The information contained in this article is not tax advice and it is not a substitute for such advice. State and federal laws change frequently, so consult with an accountant for current tax advice.
Do a Little Tax Planning
It’s important to remember that this "other income" is not tax-free. You must still pay income tax on incentive payments and other types of Box 3 income, just not Social Security or Medicare taxes. The amount you enter on your 1040 will be taxed along with all of your other regular earnings according to your appropriate tax bracket.
This could mean that the withholding from your other earnings won’t be enough to cover taxes due on the Box 3 windfall. Rather than receive a refund, you might end up owing tax when you file your return—just not as much as you would have if you'd also had to pay FICA taxes.
You can make estimated payments to the IRS in advance of filing your tax return, but otherwise, you can probably expect a tax bill come April if your incentive payments or other income were significant.