Because the IRS gets a copy of that 1099, you must report the full amount. However, since medical reimbursements for an injury are not taxable (even for 1099 workers under IRC § 104(a)), you need to "wash it out" so you don't pay taxes on it.
Your 1099 Income will be reported on Schedule C, but then you will create a custom expense to cancel out the non-taxable portion.
- Enter the full amount exactly as it appears on the form under Wages & Income > Self-Employment.
- In the Schedule C interview, look for the section titled "Other Miscellaneous Expenses" (this is usually at the very end of the expense list).
- Enter a miscellaneous expense titled: "Non-taxable medical cost reimbursement per IRC Sec. 104(a)"
- Enter the exact amount of the medical reimbursement that was included in your 1099.
Your net income on your Schedule C will only reflect your actual earnings. You won't pay income tax or self-employment tax on the medical portion.
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