1099 misc

[jewelmwiser]

My husband and 3 others were chosen to start a start-up. My husband left his employer and became an employee of the start-up and also owned a 1% share.  In 2019, the start-up let my husband go so he went back to work for his former employer.  He retained his 1% ownership share in the company.  In 2020, the startup was purchased by another company. My husband had to sign off on the sale and he netted a portion and received a 1099.  He didn't work for this company after he was let go in 2019 and had no say on the sale beyond signing off.  I know I enter the income as other income but it wants to make him self employed where we pay that tax too.  What is the correct way to enter this 1099 income since he was not self employed?

[npierson7]

Yes, you should enter the income as Other income, it isn't self-employed income, since your husband didn't actively participate in the business in 2020. You'll have to pay tax on the gain on the sale of capital assets (partnership interest in your case).

To figure the gain, you need to know your basic in the asset. It is unclear from your question if your husband hold the 1% interest less that a year or more than a year. If it's short term, it is taxed as ordinary income, and if it was more that a year, it should be taxed as capital gain. 

[jewelmwiser]

Thanks for the response. My husband held the 1% interest for over a year.  So in turbo tax,  what section or how do I report it so it doesn't create a schedule C and charge self employment tax?

[ToddL99]

What kind of 1099 did he receive and in what box of the 1099 were the proceeds reported?

[jewelmwiser]

1099 misc / box3 other income 

[ToddL99]

Report it as the sale of an investment (not reported on Form 1099-B).  This will ensure you obtain the correct tax treatment for the proceeds (Long-term gain (or loss) on the sale of an investment).

The payer should have issued a Form 1099-B, not 1099-MISC. Unless you can get then to correct their error (highly unlikely under the circumstances), report it in the Stocks, Bond, Mutual Funds and Other interview under Investment Income (answer "No" when asked if you got a 1099-B).

Depending on the amount involved, you will probably get an automated notice from the IRS later this year, proposing to increase your taxes because of the missing Form 1099-MISC. This is not an audit and is very common.

The notice will ask if you agree with the change (increase in tax) and you will have the opportunity to explain why you don't. The explanation is simple - the proceeds were from a long-term investment, were incorrectly reported on 1099-MISC and you did report them on your Schedule D.

[jewelmwiser]

Thanks so much for the help! 

[jewelmwiser]

Cpa I use for a trust account advised me in order to avoid an IRS letter, I should report the 1099 and then on the schedule C expenses use the 1099 amount and say something like "pass through investment income".  Thus the 1099 will wash out but will it still look for self-employment tax? I'm having a hard time figuring out how to do this option in Turbo Tax.  Reporting it as you said on Schedule D as investment income I can do.  Suggestions?

[DaveF1006]

My advice is to report it the way that ToddL99 and npierson7 suggests. My opinion is that if you report it the way your CPA suggests, this could trigger an audit because of the questionability of the transaction.