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.