I ran into the same problem. Entered a 1099-NEC received from a lawsuit settlement, answered the questions a about the lawsuit and not being wage-related, but TurboTax insisted on creating a Schedule C and demanding a business category. No way to exit the loop, and TurboTax refused to continue.
But your directions do NOT address the original question (that I’m reposting now). Your directions are wrong, and TurboTax’s published help articles are also wrong.
I went back to the source, IRS “Instructions for Forms 1099-MISC and 1099-NEC (Rev. January 2024).” Had to dig for this one. The 1099-NEC instructions (from the IRS) on page 10 state this very clearly:
“Generally, amounts paid to individuals that are reportable in box 1 are subject to self-employment tax. If payments to individuals are not subject to this tax, report the payments in box 3 of Form 1099-MISC.”
The defendant in my case used the wrong IRS form. 1099-NEC is for workers, only. Any entry in box 1 will trigger self-employment tax, hence the required Schedule C to support it.
The correct answer to this problem (to get around TurboTax’s bug that should have bounced the 1099-NEC entry process) is to either enter the lawsuit proceeds as misc income (with no payer details), or to instead enter it as a “1099-MISC” (settlement amount in box 3, rather than box 1) and retain the original paperwork to use in a later audit, if needed.
This TurboTax bug also calculates the tax due incorrectly. Since the software silently does not accept the value we enter as the taxable settlement amount, even when we answer the rest of the questions correctly. I was ready to file an extension with the dollar amount shown as a tax payment. Good thing I didn’t. Using the work-around I described above caused my tax due amount to increase enough to add another decimal point. That’s a significant error, with penalty and interest added.
This problem with TurboTax failing to direct customers to the correct process for entering taxable lawsuit settlements with this software goes back several years. Inexcusable.
