How to Report 1099-MISC Box 3 Payments on Your 1040 for Tax Year 2019
Some 1099-MISC income is not subject to FICA taxes
All income reported on IRS Form 1099-MISC is not created equal. Yes, you must report all income that appears in boxes 1 through 10 on your Form 1040 tax return, but how this money is taxed can be different depending on the box in which it appears. You get to keep more of your money if it's reported in box 3 of the form because it's not subject to FICA taxes.
Incentive Payments in Box 3
Box 3 of the 1099-MISC form is tagged for “Other Income," and this includes what the Internal Revenue Service calls “incentive payments.” They’re most common 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.
They’re generally paid by the manufacturer, not the dealership. They’re 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 2019 Form 1040—the return you'll file in 2020. But they're not taxed in quite the same way as earnings that appear in box 7 of Form 1099-MISC, "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 incomes reported there. "Other Income" reported in box 3 also includes any sources that don't fit neatly anywhere else on the form. They might be:
- 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 is reported as other income in box 3 if you win a brand new BMW by participating on a game show, but not if you won a paid raffle for it. In this case, it's gambling winnings.
The Tax Advantage of Box 3
Box 3 “other income” is subject to income tax, but it's not subject to FICA taxes—Social Security and Medicare—or to federal unemployment tax. This is the important distinction. It's 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 exception is why you get to keep more of the money.
Compare this with box 7 of the 1099-MISC for nonemployee compensation. Box 7 includes income paid to independent contractors for services rendered. This money isn't subject to federal withholding, either—but again, you'll pay income tax on it. You're expected to remit quarterly estimated tax payments during the year, and penalties and interest can apply if you don't.
Independent contractors do have to pay FICA taxes. They must pay not only their own half of Social Security and Medicare but the other half which an employer would normally have contributed as well. This is known as the self-employment tax, and it can be a somewhat significant tax burden.
Not so with box 3 income.
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 with the 2019 Form 1040. You would then enter the total amount of other income as calculated on Schedule 1 on line 8a of Form 1040.
This is not the same 1040 that you used when you filed your 2018 tax return in 2019. There was no Schedule 1 for tax years 2017 and earlier, and the Form 1040 and Schedule 1 have additionally changed since the 2018 tax year.
Entering the total on line 8a separates it from any wages or salary you earned, which are entered on line 1, and 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 self-employment tax, Social Security, or Medicare because it wasn't salary, wages, or self-employment income.
Can You Deduct Expenses From Other Income?
Unfortunately, you can’t deduct work-related expenses from the total of your other income, even if it’s an automotive manufacturer’s incentive payment. You used to be able to claim work-related expenses through 2017 if you itemized your deductions, but these expenses were among the miscellaneous deductions that were eliminated by the Tax Cuts and Jobs Act effective 2018 through 2025.
Self-employed individuals—those with earnings reported in box 7 of the 1099-MISC—can still deduct their costs of doing business on Schedule C…but then they have to pay the self-employment tax on the balance.
Mistakes on Past Returns
Dig up those 1099-MISC forms you received at the beginning of the year and for previous years as well. Take note of the boxes in which the reported payments appear, then look at your tax returns. If income appears in box 3 but you didn't accurately report it on line 21 of the old Form 1040, all isn’t lost.
You can file an amended Form 1040X to move the income to the appropriate line so you don’t have to pay FICA taxes on that money. It’s recommended that you also include a written explanation telling the IRS that you’re not self-employed and detailing the source of the money.
You can file an amended return up to three years after you file an original return, or up to two years after you last paid any tax on a previous year’s return, whichever is later. If you paid self-employment tax in that year because you entered the income on the wrong line, you should receive a refund.
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 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 to the box 3 windfall. Rather than receive a refund, you might owe some 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 at the time you receive the payments 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.
NOTE: 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, and the information in this article may not reflect your own state’s laws or the most recent changes to federal law. Please consult with an accountant for current tax advice.
IRS. "Publication 525 Taxable and Nontaxable Income." Page 33. Accessed Feb. 11, 2020.
IRS. "2020 Instructions for Forms 1099-MISC and 1099-NEC." Pages 5-6. Accessed Feb.11, 2020.
IRS. "Topic No. 308 Amended Returns." Accessed Feb. 11, 2020.