FORM 1099-NEC SE TAX

[PATAX]

client received 1099-nec box 1 nonemployee compensation for $7,500.00. received from a large supplier to the company that he works for. the $7,500.00 was for 4 day vacation to islands for him and his wife, all expenses apparently paid. no federal income tax withheld. it looks like it is subject to SE tax..  I checked quickfinder, thetaxbook, wk us master tax guide, and tr federal tax handbook. what do you guys think? thanks a lot. 

[dkh]

I think it should be reported as Other Income Schedule 1.   Wouldn't it be considered a "Prize or Award".

[PATAX]

That's what it sounds like. But all the IRS knows is $7,500 in the non employee compensation box which they usually consider self-employment tax. If I pick it up the way that you recommend do you think they will receive a IRS letter?

[abctax55]

Research 'spiffs' to see if maybe that applies (altho I remember those as being related to car salesmen..).

IF you determine it shouldn't be subject to SE tax, run it in/out that way so the IRS can match?

[qbteachmt]

If it really was a prize or award, it should have been reported on 1099-Misc, in other words.

[PATAX]

Thanks I'll research that spiffs. It really was an award or prize as I do the company tax return that he works for. He works for his family's LLC partnership but he is not an owner. The supplier that gave him the 1099 NEC provides a large amount of the product to the family company that he works for. So I'm sure that it was a prize or an award.

[qbteachmt]

This is not unusual for instance, for a purchasing agent. But a large business won't let their purchasing agents accept valuable gifts, either, to prevent corruption in competitive bidding contracts.

[BobKamman]

Calm down, everyone, the sky is not falling. 

Have you asked the issuer why they decided on a NEC instead of a MISC, and politely suggested that in the interest of good company relations they correct it to the right form?

Yes, it is a SPIF, and not subject to SE tax or FICA tax.  By the way, they probably outsourced the trip to some travel agent that charged the buyer $7,500 but booked the whole trip for $4,500.  Clients should have done some research at the time, to figure out how much it really cost.  

We don't really know what IRS is doing when NEC is used for MISC income, because the NEC hasn't been around that long.  Yes, it's similar to using the wrong box when we only had the MISC.  

Are they sending CP2000's next year to people who might owe $1,000 in SE tax?  We don't know, the guy who makes those decisions hasn't been confirmed by the Senate yet.  Last time I had a case like yours, clients won a door prize (not employment related), got a 1099 for $2,500, paid tax on $1,500 because that was the FMV of the trip, attached a statement to the return explaining what happened, got an IRS notice anyway.  We sent back a copy of the return attachment, and the case was closed with no adjustment.  Your results may vary, but remember your job is to prepare a complete and accurate return.  Not to play trick the computer, when they didn't even invite you along.  

[PATAX]

Thanks for the information Bob. I just called the client and he is going to call that company to see if that can be put that on a 1099 miscellaneous as an award or gift. The only thing though is the company that issued it to him is a very large Regional company and I would think they have a large CPA firm and or internal staff taking care of this matter, so one would think that they would get this right the first time but who knows. Thanks.

[BobKamman]

Read the IRS instructions for filers of 1099-MISC and 1099-NEC. For Box 3 of the MISC, they tell you not to use it for things that belong in Box 1 of the NEC.  And for Box 1 of the NEC, they tell you not to use it for things that belong in Box 3 of the MISC.  Is it a Moebius twist?  No, it is more like Schrödinger's cat.