College Scholarship from dad's employer reported as 1099-MISC for student

[brommabo]

Our son applied for and got a scholarship from my husband's company that was reported on a 1099-MISC Box 7 in my son's name($3000). Do we put that as a scholarship on our tax return which affects education credit negatively since he has a full tuition and fees scholarship from his college? (We have claimed him as a dependent.)Or does he report it as self employment income and file his own tax return? He had no other income in 2019.

[KrisD15]

If the scholarship was not restricted (they did not specify that it must be used for tuition) and you can apply it to something other than tuition, such as room and board, then yes, use the tuition towards a credit and have the student claim the scholarship. That would make the most sense. 

[brommabo]

The scholarship is not restricted but he has a full tuition and fees scholarship already at his school so I can't apply this towards tuition for education credits off my taxes. When I go into his tax return, he does not qualify for an education credit since I am claiming him as a dependent. He has to pay taxes on it on his return, federal and state since he exceeds $1100 in income with the $3000 scholarship(that he received a 1099-MISC for). What to do?

[SusanY1]

Scholarship income should be reported as income to the student, not income to the parent.

I would not report it as self-employment income, though, even though it displays in Box 7 on the 1099-MISC.  

In TurboTax, enter it as a Scholarship by using the search term scholarship income in the Search tool and then clicking on the Jump to link that appears in the search results.  Ignore the 1099-MISC for the most part but keep it in your records and be prepared to answer any notice from the IRS to explain what it was for, should they inquire.  

If there is an award letter or other documentation about the scholarship, I would keep that with the 1099-MISC in a file somewhere easy to find to make replying to the IRS quickly and easily if they send a letter later in the year.  (Don't pay extra taxes just to avoid a letter that has an easy response to it!)

You can file your son's taxes for free here: Free File powered by TurboTax.