Misc 1099, but hobby income?

[rtsietsema]

Client signed up with a direct sales type company in order to get 20% discount on her purchases. She has held no "parties", sold to no one else, has no intent to sell. Just does her own craft type projects.

Had the luck to be enter into a drawing for purchases made, and won $1000 cash prize. Now has misc 1099 with box 7 nonemployee compensation.

I suspect the IRS wants to see this on schedule C, but as she doesn't really have a business, no business expenses, and would rather not pay SE taxes I feel it is best treated as hobby income, subject to ordinary taxes, but not SE tax.

What is the best way to treat this and get it onto line 21 as hobby income?

[Roland Slugg]

I believe the $1,000 should have been reported in Box 3, not Box 7, because the prize was paid because of a drawing, not for services. In any case it is in Box 7, so you need to deal with it.

If I were preparing the winner's tax return, I would report the $1,000 on F-1040, line 21, and call it "Prize." The IRS might send a letter, however, requiring a reply. So in addition to reporting the $1,000 on line 21, you could also report it on Schedule C, then list an expense for the same $1,000 and call it "prize paid" or something like that.

[JMO]

Disclosure Statement Form 8275

I agree the prize should have been reported in Box 3 of 1099-MISC. Even though the prize was reported incorrectly in Box 7, I would still list the amount on Line 21 and label it as a is Prize. In addition, I would attach a disclosure statement to the return outlining the circumstances behind the prize and that the reporting of the prize in Box 7 is incorrect. [In a perfect world, the client should request a corrected 1099-MISC].

[rtsietsema]

Agreed

I agree with the box 3. However we all know that it is unlikely to get corrected. I will enter it as a prize on Line 21, and also report it to Schedule C with an expense note moving it to Line 21 as, 'Not subject to SE".

I will also advise the client to keep all records for this prize, and any other account activity for the year, and hope I don't see a 1099 next year. I will caution her that this year's return should be amended if she receives another 1099 from the same source.

Thanks for the input.