1099-Misc Box 7

[AJsTax]

Ok, guys, I need some help. I have been at this business a long time (15 years), first starting at Block and then progressing to my own clients and working at a CPA firm doing hundreds of returns per year. I have a situation that I can find reasoning for both sides of the argument, but no real cites.
Client works as a manager for a tire installation store. Is a local firm with maybe 3 stores. He receives some incentive bonuses from one of the tire manufacturers for meeting some goals, not sure exactly what. Anyway, they are from the tire manufacturer, not his employer. He is an employee, not self-employed in any way. But he does sell tires all day every day and receives the incentives on a regular basis.
The amount is reported to him on a 1099-Misc in box 7. I have always been told and in classes I taught that the amount in box 7 must go on Sch C and be subject to SE. Just recently I read a post that included a Publication # 3204 for the IRS that disputes this and says this is not SE income. My software will not allow me to put it anywhere other than Sch C unless I lie to it and say it is box 3 income.
My questions are: I feel the amount must be in box 3 to be exempt. comments?
I have seen reference to a tax court case "Batok vs commissioner" but can not locate it. any help finding that?
Any thoughts and discussions on this subject will be greatly appreciated. Please remember that this subject of taxes is so diverse and messed up there can be several correct answers to the same questions and judges don't even agree often and the IRS sometimes don't agree with the courts!!!!!
I have read nearly everything I can find on this including the Pubs, TTB, and many posts on here and TaxAlmanac.

[travis bickle]

In a perfect world,

the IRS is correct -- income reported in box 7 of Form 1099-Misc is supposed to be reported on a Sch C.

But, are we/you/your client in a perfect world?

I/We all have had numerous instances where income reporting documents are filled out incorrectly. And, notice the title for box 7: "Nonemployee Compensation". Ergo, when someone in payroll comes across this situation, they put the money in box 7, "Because, well, s/he is not an employee . . .".

Bottom line is this -- I advise the client to have the issuer issue a corrected 1099-Misc [virtually never occurs] and I report this type of income on L21 as "Company Bonus/Sales Bonus/etc" whatever the situation is.

Lastly, I advise the client that the IRS might send out a letter, etc and if so to contact me ASAP -- to date, I have never received a letter from the IRS on this issue.

[JohnH]

I agree with Travis.

I've prepared numerous returns for cleints who received "SPIFFS", many of which were reported on box 7 of the 1099-Misc in error. If the payments meet the definition of a "SPIFF", then I report them on line 21 without an SE and have never had a problem. I think the largest one I've ever handled this way received about $12K in "SPIFFS", so I don't think it's a matter of small amounts sneaking through.

The bottom line is that the issuer of the 1099-Misc doesn't determine the nature of the payment - the facts & circumstances are what matters. It helps when the 1099-C is issued correctly, but when the issuer fails to do that you should still prepare the return properly, even if it means having to allow for the fact that you may need to correspond with the IRS later.

[Jesse]

Here is a link dealing with spiffs, sounds similar to your situation.

http://www.thetaxbook.com/forums/showthread.php?t=7305&highlight=salesman+bonus

As Travis said, the 1099MISC is many times incorrect. We have quite a few loggers in our area and timber royalties or stumpage is suppose to be reported on a 1099S, but yet most report on the 1099MISC, some in box 3, some in box 7. When I come across box 7 I always do a "dummy" schedule C and in other expenses I enter "timber royalties transferred to schedule D" and it zeros out. IRS has yet to correspond to any of my clients, not that this means it is correct, just the way I handle it.

"facts & circumstances" - my favorite saying!

I was typing while you posted - Gee great minds must think alike! (although some disagree my mind is so great).

[FEDUKE404]

Use line 21 if possible and appropriate

With the income reported in Box 7 of Form 1099-MISC things can get a bit shaky.

Most employers or whatever report such income in Box 3 of Form 1099-MISC, which greases the skids a bit.

In any case, your software SHOULD allow you to place the income on line 21 of Form 1040. Click on that line and you should get something resembling a screen with various options.

If all else fails, do the +/- thing on Sch C. Just be sure your client did not receive compensation for work performed. (The old CYA aspect )

FE

[AJsTax]

Thank You!!

Each one of the replies is pointing to the conclusion I have been getting after reading the supporting information. I will amend the return and see what difference it makes and then call the customer to explain. At least this one is a close friend and will work with me on this issue, we discussed how to handle it in length in the past.
The software at my job (Lacerte) does have several options to identify line 21 income and you do not have to enter the 1099. The "less expensive" software I use at home is very restricted and will not allow you to override the entering of the income on Sch C, unless you put it in box three in the input screen. If you try to put something directly onto the form it yells at you and makes you fill in the supporting docs. The is one of those that you can use the question method of doing returns (not TurboTax either) but I always use the direct fill in the forms method. This software has been ok up to now, but I will need to move up to a better program this year as I plan to take my business full time.
Enough on that. I will add that I get a lot out of reading the posts and appreciate the time you take to answer.

[Lion]

Spiffs

I had an appliance saleswoman who received dozens of 1099-MISCs from manufacturers. Some had her incentives in Box 3 and some in Box 7. All were for the same type of push money from the makers. I put all on line 21.

[S T]

Backup

I would think that if the t/p had the backup documents, (my auto people that receive spiffs receive a print out from the Manufacturer or Dealer that they work for), then you could place on line 21 as income subject to SE, a line 21 reversal for SE and a line 21 NOT subject to SE. My software will issue a detail sheet. At least then you are showing the proper amount for box 7 reversing and showing Box 3.

Sandy

[solomon]

From instructions to Sch C - Note with "continuity and regularity" otherwise Line 21.

Use Schedule C (Form 1040) to report income or loss from a business you operated or a Profit or Loss profession you practiced as a sole proprietor. An activity qualifies as a business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. For example, a sporadic activity or a hobby does not qualify as a business. To report income from a nonbusiness activity, see the instructions for Form 1040, line 21, or Form 1040NR, line 21.

See legalbitstream.com to find Batok.

[taxea]

tax court case "Batok vs commissioner...have you tried to google it?

as for your "tax program at home" you get what you pay for.

I do agree with all the above who stated you can put it on Ln 21 and not link it to Ln 7 or Sch C.

Your arguement is that these obviously are not wages or for services rendered because they are issued by the Manufacturer and not the employer the client works for. Does he have any kind of documentation from them that explains the income...perhaps a copy of that should be kept in your client file. taxea

[BHoffman]

I also have clients who receive Spiffs. Line 21, no SE.

[FEDUKE404]

Not necessarily any software issue

...as for your "tax program at home" you get what you pay for....

FWIW, both TurboTax and TaxAct (plain vanilla versions) have a reasonably simple process to place Form 1099-MISC income not subject to SE tax on line 21 of Form 1040. You click on the worksheet for line 21 and guess what appears! It still requires some brain power to understand when that option can be used, but there is no "software problem" with either of those readily available consumer products.

Unless the original poster (AJsTax) bought his/her software from a local middle school geek, my guess is the answer is already there but just has not been found.

FE

[JohnH]

Yeah, sure. Tell it to Tim Geithner...

[AJsTax]

FE is out in LEFT field

FWIW, both TurboTax and TaxAct (plain vanilla versions) have a reasonably simple process to place Form 1099-MISC income not subject to SE tax on line 21 of Form 1040. You click on the worksheet for line 21 and guess what appears! It still requires some brain power to understand when that option can be used, but there is no "software problem" with either of those readily available consumer products.

Unless the original poster (AJsTax) bought his/her software from a local middle school geek, my guess is the answer is already there but just has not been found.

FE

I have used taxact for several years now and IF you follow the links within the software and place the income exactly as it is on the 1099-misc it will go to SCH C. You have to lie to it and put it in Box 3 to go to line 21. I use a computer all day, every day with Lacerte, QuickBooks and Taxact to name a couple and spend a lot of time teaching others how to do it...So I do not need someone to tell me that I do not know how to use the software. I do know how to get around the software...THE whole issue is whether we should go around the VERY SPECIFIC rules for the 1099-misc and put income listed in Box 7 somewhere other than on a Sch. C. I am not alone in this. The other firm I work for, the principal individual has done taxes for 25+ years, well over 1500 1040 clients plus business clients and he has always followed the rules in this case.
I thank those who answered the questions.
Yes, I googled the case and got no where, just three board discussions. I know there is a link out there to read the cases, I have just lost it for now.

[FEDUKE404]

REPEAT - Don't blame the software

I have used taxact for several years now and IF you follow the links within the software and place the income exactly as it is on the 1099-misc it will go to SCH C. You have to lie to it and put it in Box 3 to go to line 21. I use a computer all day, every day with Lacerte, QuickBooks and Taxact to name a couple and spend a lot of time teaching others how to do it...So I do not need someone to tell me that I do not know how to use the software. I do know how to get around the software...THE whole issue is whether we should go around the VERY SPECIFIC rules for the 1099-misc and put income listed in Box 7 somewhere other than on a Sch. C. I am not alone in this. The other firm I work for, the principal individual has done taxes for 25+ years, well over 1500 1040 clients plus business clients and he has always followed the rules in this case.
I thank those who answered the questions.
Yes, I googled the case and got no where, just three board discussions. I know there is a link out there to read the cases, I have just lost it for now.

Well, thank you AJ for the very strong vote of confidence.

To assist you in your personal use of TaxACT, here is how you enter the information for non-Schedule C income reported in Box 3 of Form 1099-MISC:

1 - In the "Documents Received" section, select "Form 1099-MISC."
2 - In the menu that appears, for Box 3 click on the folder on the right side.
3 - Select Form 1040 Miscellaneous Income. Do not select Schedule C which appears above it.
4 - Enter the appropriate information from your client's Form 1099-MISC, paying particular attention to Box 3.
5 - Go to Form 1040, and look at line 21. The information from Box 3 of Form 1099-MISC will be there. You can also click on the folder beside "worksheet attached" to view any other entries that may be included on line 21.
6 - There is no need to "lie to the software."

As mentioned by others, if the income on the Form 1099-MISC appears in Box 7, that is a separate problem.

I commend you for your past tax experience and computer expertise.

One thing that many of us learn from these boards is that frequently we can procure useful information from other board members.

......And also most of us are not error-free.

FE