How to Report 1099-MISC Box 3 Payments on Your 1040 in 2019
Some 1099-MISC income is not subject to FICA taxes
Not all 1099-MISC income is created equal. Yes, you must report everything that appears in boxes 1 through 10 on your tax return, but how this income is entered and taxed can be different depending on the box in which it appears.
The bottom line: You get to keep more of your money if it's reported in box 3 of the 1099-MISC.
Incentive Payments in Box 3
Box 3 of the 1099-MISC is for “Other Income,” and this includes something the Internal Revenue Service calls “incentive payments.” They’re most common in the auto industry—they're bonuses paid to salespersons when they sell a certain vehicle—and they can really add up over the course of the year.
They’re paid by the manufacturer, not the dealership. They’re not wages, salary, or payment for services, even if the incentive is remitted to the dealership and the dealership then hands the money over to the salesperson. If the dealership were to pay it out of its own funds, the payment would appear on the salesperson’s W-2 and would be taxed just like regular income.
Incentive payments are still taxable income, but not in quite the same way as income that appears in box 7 of Form 1099-MISC, "Nonemployee Compensation?" That's why you get to keep more of the money.
Other Income That Might Appear in Box 3
Box 3 isn’t limited to auto salespersons, although they often reap the benefit of having some income reported there. "Other Income" reported in box 3 also includes prizes and awards. That piddling payment you received for serving jury duty will turn up in box 3—yes, that’s taxable income, too. If you receive taxable damages in a lawsuit, this money is reported here, too.
Basically, this box 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 work to earn a living, right? 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. If you win a brand new BMW on a game show, its fair market value is reported as other income in box 3.
It’s Taxable Income, But…
Box 3 “other income” is not subject to FICA taxes—Social Security and Medicare—or to federal unemployment tax, and this is an 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 the money.
Compare this with box 7 of the 1099-MISC for "Nonemployee compensation." This isn't subject to federal withholding, either—but again, you'll pay income tax on it eventually. This box includes income paid to independent contractors for services rendered. They’re expected to remit quarterly estimated tax payments during the year because taxes are not withheld.
But 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.
How to Report 1099-MISC Box 3 Income
Incentive payments and other types of income that appear in box 3 are reported on line 21 of Schedule 1 of the new Form 1040 that's required for the 2018 tax year—the return you'll file in 2019. You can then enter the total amount of other income that was calculated on Schedule 1 on line 6 of the 2018 Form 1040.
This is not the same 1040 you would have used in 2018 when you filed your 2017 tax return. There was no Schedule 1 for tax year 2017, either.
Entering the total on line 6 separates it from any wages or salary you earned, which are entered on line 1, and from self-employment income that’s calculated on Schedule C then also reported on Schedule 1. This tells the IRS that this money is not subject to self-employment tax, Social Security, or Medicare. It was not 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 these expenses against if you itemize your deductions through 2017, but work-related expenses are among the miscellaneous deductions that were eliminated by the Tax Cuts and Jobs Act effective 2018 through 2025.
Self-employed individuals—those with income 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.
If You Made a Mistake
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 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 self-employment tax 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. And 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 income 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 windfall as well. Rather than receive a refund, you might owe some tax when you file your return—just not as much as you would have owed 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.