My husband's employer pays 100% of the college tuition for our son (dependent). For 2021, they issued my son a Form 1099-NEC with box 1 (nonemployee compensation) filled in with the tuition amount of $12,880. My son also received a Form 1098-T in his name with the same amount in box 1 and also in box 5 for scholarships and grants.
I don't see anywhere on my husband's W2 where they entered any of this tuition amount.
Now I am confused on how to report these forms and whether my son or husband should be reporting it as it is not self-employed income.
You should be confused. You have a messy situation. The money should have been added to box 1 of your husband's W-2. There would be no other notation on the W-2. The fact that, the employer issued a 1099-NEC, pretty much means it was not on the W-2.
Ideally, you go back to the employer and ask them to issue a corrected 1099-NEC (with $0) and a corrected W-2 (adding the $12,880 to box 1). Even doing that, the tax consequences will be about the same either way, so you may not want to "look a gift horse in the mouth".
Otherwise, you're going to have to use a workaround in TurboTax. There are several options. Here's the primary two:
1. Go ahead and enter it as self employment on the child's return. Because he gets the full $12,550 standard deduction, very little will be subject to income tax, but most of the $12,880 will be subject to self employment tax (social security and medicate tax). Your husband and his employer woulda paid that if it went on his W-2. About $1850 total tax.
2. Enter in TurboTax at the 1099-NEC screen and identify it as "sporadic income" (read the choices carefully). This makes it unearned income and subject to a smaller standard deduction ($1100) and the "kiddie tax" where the child is mostly taxed at the parent's marginal tax rate. If you're in the 22% bracket, use #1. If you're in the 12% bracket, use #2. But be aware not reporting 1099-NEC income as self employment is an IRS red flag (you should be able to explain it away, if contacted by the IRS).
The good news is you are probably eligible for the Tuition credit (depending on your income) because the tuition was NOT paid by tax free scholarship. When you enter the 1098-T change box 5 to 0. This is worth as much as $2500. Bottom line: you should come out ahead.
You may be aware that a child's income, classified as taxable scholarship, is subject to special tax treatment (only $33 in tax would be due, in your case). But that doesn't apply in your case. Despite the school putting it in box 5, of the 1098-T, employer assistance is not classified as scholarship for tax purposes.
@Hal_Al Thank you so much for all the great information! I now just noticed that on the 1099-NEC, they have the recipient as my son's name but for the recipient's TIN they used my husband's social security number.
Do you think the best decision would just be to file a tax extension for both my husband and my son and have the employer issue a new W2, with the tuition in box 1 and a corrected 1099-NEC with my son's social security number and an amount of $0 in box 1?