How to Report 1099-MISC Box 3 Payments on Your 1040

Some 1099-MISC income is not subject to FICA taxes

••• Getty Images

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 treated for tax purposes 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.

Incentive Payments

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—bonuses that are 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.

These payments are still taxable income, but not in quite the same way as income that appears in box 7 of Form 1099-MISC and that's why you get to keep more of the money. 

Forms of “Other Income”

Box 3 isn’t limited to auto salespersons, although they often reap the benefit of having income reported there. Other prizes and awards are reported in box 3 as well. That piddling payment you received for serving jury duty will turn up in this box—yes, that’s taxable income. If you receive taxable damages in a lawsuit, this money is reported in box 3 of Form 1099-MISC.

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 salesman 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 federal unemployment tax, and that's an important distinction. It's not subject to federal withholding, either. This can save you quite a few tax dollars.

Box 7 on the 1099-MISC is for "nonemployee compensation" and this isn't subject to federal withholding, either. 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.

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 Form 1040. This line is also labeled “other income.” This separates it from any wages or salary you earned, which is entered on line 7, and from self-employment income that’s calculated on Schedule C then reported on then on line 12 of the 1040.

If you have multiple sources of other income, add them together and enter the total on line 21. This tells the IRS that this money is not subject to self-employment tax. It was not salary, wages, or self-employment income.

Unfortunately, you can’t deduct work-related expenses from the total, even if it’s an automotive manufacturer’s incentive payment. You can claim these expenses against your entire income if you itemize your deductions, however, at least through 2017.

Work-related expenses are among the miscellaneous deductions that were eliminated by the Tax Cuts and Jobs Act effective 2018 through 2025. But the TCJA also doubles the standard deduction for these years, making it more advantageous for many taxpayers not to itemize to begin with.

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. If it’s box 3 but you did not report this income on line 21 of your 1040 when you filed your tax return, all isn’t lost.

You can file an amended Form 1040X to move the income from line 12 to line 21 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 line 21 will be taxed along with all your other regular income according to your tax bracket.

This could mean that the withholding from your other earnings won’t be enough to cover taxes due on the windfall. 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 the incentive payments were significant.