Understanding 1099-MISC Box 3 Payments

 Those boxes on your tax forms mean a lot more than you might think. In fact, when it comes to Form 1099-MISC, box 3 is of particular note. The money you report in this box is not subjected to FICA taxes, enabling you to keep the bulk of it. However, you can’t abuse this box and get away with it, which is why it’s imperative to understand what it is and how it should be used.  

Incentive Payments  

Box 3 is used for all types of “other income,” but it’s most commonly used for incentive payments. These payments often take the form of special “bonuses” or “incentives” offered to employees who reach a certain goal specified by the employer. Unfortunately, these nice payments that you may earn for doing an awesome job are not “free money.” They’re taxable and should be included on this form, though the taxation is not the same as other, more traditional types of income.

No FICA Taxes

If you’re feeling bummed about having to report your incentive income or other box 3 income, don’t be!

While hardly any earned money is ever truly tax free, this income is at least free from FICA taxes and federal unemployment taxes. You only pay the income taxes, which means you ultimately still get to keep more of this money than you would with most other types of income.

Work-Related Expenses Deductions

While it would be nice if you could deduct work-related expenses from your box 3 income, you can’t. The IRS is already giving you a break on FICA taxes and unemployment taxes, so it’s not really inclined to give you any further breaks. This is, sadly, a case of just being grateful for what you get, but honestly, any relief from the IRS is worth celebrating.

Bear in mind that, if you’re filling out a 1099-MISC and box 3 on top of that, you likely have a more complex tax situation than the average taxpayer. And, that fact alone means that you could probably benefit from some professional tax help to make the most of your situation. Since you’re lucky enough to have “extra” income, though, it definitely helps to use some of it for professional tax assistance.