Tax Lawyer's Blog

Tax Preparer and economist Mary O’Keeffe of Bed Buffaloes in Your Tax Code warns tax preparers about the dangers of failing to properly report income shown on Form 1099-Misc:

Most 1099-MISC forms that we see at our VITA site are actually self-employment income that needs to be reported on Schedule C-EZ or Schedule C.

The title of the 1099-MISC for “miscellaneous income” has a name that tempts the unwary to list it on line 21 as “Other income.” That is a trap with major bed buffaloes hidden within! Don’t fall into that trap. Listing what is really self-employment income as “other income” can cause lots of problems with your return!

1) Your return won’t calculate the self-employment tax, which means that you could get a “friendly” notice from the IRS demanding payment of those taxes plus interest down the road.*

 2) Your return will not correctly compute your “earned income,” which could cause trouble for your Earned Income Credit, or create unnecessary “Kiddie Tax” problems, or prevent you from qualifying for the refundable part of the American Opportunity Tax Credit. That’s because “other income” reported on line 21 is not considered “earned” but self-employment income reported on a Schedule C or C-EZ is earned income.

3) Reporting the self-employment income properly will allow you to deduct your expenses of earning that income on your Schedule C or C-EZ. (By contrast, if you report it incorrectly as “Other income” on line 21, you won’t be able to deduct any expenses associated with getting that income unless you itemize, and even then it will be subject to limitations.)

(Note: *if you do fall into the trap of not calculating and paying your self-employment tax, you will find yourself in distinguished company with Treasury Secretary Geithner. But trust me, you don’t want that kind of trouble!)

That “Other Income” line Mary talks about gets a lot of IRS scrutiny and should only be used in certain, specifically defined circumstances.

If you are a tax type like me, I recommend you subscribe to Mary’s blog.

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