1099-NEC

[Karen7701]

My husband received a 1099-NEC from the fire Department he worked at for over 25 years, he receives it once a year in January. He is not a contractor, own a business, or hobby. It is for a Cola payments that was in his contract to received once he retired. What do I do with it? 

[KrisD15]

Form 1099-NEC reports Non-Employee Compensation, which means Self-Employment income. 

The IRS resurrected this form several years ago to specifically designate Self-Employment income. 

There is no other way to report that income. If if it reflects retirement income, they should use Form 1099-R or Form 1099-MISC. 

You should contact the payroll department that issues the forms and ask why they use 1099-NEC. Ask them to correct and issue the proper form. (You don't want to go through this year after year) 

If you are stuck with that Form, you need to report it, the IRS will look for it to be matched. 

As Self-Employment income, it will incur Self-Employment tax, which is FICA (social security tax.  COLA on retirement shouldn't trigger Self-Employment tax. 

You will also be forced to include Schedule C as if you are Self-Employed. 

Your options are to 

• Contact Payroll and wait for a correct form to be issued to substitute for the 1099-NEC
• Enter Form 1099-NEC, and "back out the 1099-NEC", then enter the income independently. You will still be required to have schedule C generated. 

For the second option, enter Form 1099-NEC, you will be forced to link it to a schedule C. Once linked, establish a miscellaneous expenses on the Schedule C called something like "Erroneous 1099-NEC issued for COLA" or similar to describe your situation. 

Next, EITHER enter the same amount either as "Other Income" 

• Wages and Income
• Less Common Income
• Miscellaneous Income    START
• Other reportable income    START    use a similar description such as "to account for erroneous 1099-NEC"

This won't put the income where it SHOULD be, but it will work for the Federal return. If your sate handles the retirement income differently, that would be a problem.

OR

enter as "Retirement Plans and Social Security"

• Wages and Income
• Retirement Plans and Social Security
• IRS, 401(k), Pension Plan Withdrawals (1099-R)    START or UPDATE 

Select to add a 1099

Type it in yourself

I need to prepare a substitute 1099-R

Continue through this interview

The return may need to be printed and mailed with an explanation statement

As you can see, the best scenario is to have the proper form to enter