You have received an erroneous 1099-Misc
You have several choices:
- Ideally, you get a corrected 1099-misc from the payer. This probably won'y happen because their records probably show they disbursed $8955 to you rather than the actual $500, you got.
- Report only $500 on your return. Attach a copy of the 1099 and a statement explaining the circumstances. You can't e-file. From the IRS instructions for form 1099-Misc: Form 1099-MISC incorrect? If this form is incorrect or has been issued in error, contact the payer. If you cannot get this form corrected, attach an explanation to your tax return and report your income correctly.
- Report the total $8945 on schedule C and take a $8455 deduction under other expenses.
- Do nothing and hope you can explain it away when & if the IRS contacts you.
I would do #3. Be advised, you will have to pay self employment (social security & medicare) tax (SET), in addition to income tax, on the $500.
There is a 5th alternative. There is a "one time gig" exception to paying SET on this kind of income.
Report the income as misc line 21 income (enter in TurboTax at the 1099-Misc screen**) . Then enter a line 21 deduction, $8455. In TurboTax (TT), enter at:
- Federal Taxes tab
- Wages & Income
Scroll down to:
-Less Common Income
-Misc Income, 1099-A, 1099-C
- On the next screen, choose – Other reportable income - Enter the number with a minus sign (-) in front. Briefly explain at description.
** The IRS considers anything in box 7 of 1099-MISC to be self employment income. TurboTax (TT) aggressively steers you in that direction, even if the amount is in box 3. If you try reporting box 7 income as anything else, you chances of hearing from the IRS are high.
That said, the key to getting TT to treat it as other income is to follow these steps:
Enter the 1099-Misc
On the next screen Describe what the payment was for
On the next screen select "none of these apply"
On the next screen select "No it didn't involve work like my main job"
On the next screen select "I got it in 2018" ONLY
On the next screen select No, it didn't involve intent to earn money
TT will put the amount on line 21 of form 1040 as other income
