How To Report 1099-MISC Box 3 Payments on Your 1040

Box 3 of the 1099-MISC is for any income you earn that isn't subject to self-employment taxes. You'll need to report that income on your Form 1040 via a series of simple steps. Learn how to report your Box 3 income and which forms you'll use.

How To Report 1099-MISC Box 3 Income

You'll report Box 3 income such as incentive payments on Line 8 of Schedule 1, which you'll submit with Form 1040. You would then enter the total amount of other income and unemployment income on Line 10 of Schedule 1. That's the figure that you'll then enter on Line 8 of Form 1040.

Entering the total on Line 8 separates your Box 3 income from any wages or salary you earned.and self-employment earnings you calculate on Schedule C. Listing your Box 3 income on your 1040 tells the IRS that this money isn't subject to Social Security or Medicare tax because it wasn't salary, wages, or self-employment income.

Incentive Payments in Box 3

"Other Income" from Box 3 of the 1099-MISC form includes what the IRS calls "incentive payments." They're most commonly found in the auto industry as bonuses paid to salespersons when they sell a certain vehicle, and they can add up over the course of the year.

These incentive payments are generally paid by the manufacturer, not the dealership. The IRS does not wages, salary, or payment for services. This status is true even if the manufacturer sends the incentive to the dealership and the dealership then hands the money to the salesperson. The payment would appear on the salesperson's W-2. This bonus would be taxed like regular earnings if the dealership were to pay it out of its own funds.

Other Types of Box 3 Income

Box 3 isn't limited to incentive payments to auto salespersons. "Other Income" reported in Box 3 also includes any sources that don't neatly fit anywhere else on the form, including:

• Prizes and awards
• Payments you received for serving jury duty
• Taxable damages received in a lawsuit
• Winnings from

This list is not exhaustive. Box 3 reports any income you receive from an endeavor that you didn't engage in for profit, and that's admittedly a gray area. Prizes and awards only fall into this category if you did not place a wager to reap the winnings. For example, the car's fair market value would be reported as "Other Income" in Box 3 if you won a new BMW on a game show, but not if you won it in a raffle for which you bought a ticket. In that case, you'd report it as gambling winnings on Schedule 1.

Tax Considerations for Box 3 Income

Form 1099-MISC's Box 3 "Other Income" items are subject to income tax, but they are not subject to FICA taxes—Social Security and Medicare—or to the federal unemployment tax...this is the important distinction.

This "Other Income" is not subject to federal withholding, either. Still, this doesn't mean you won't have to pay income tax on the amount eventually. Taxes just won't be withheld at the time you receive payment.

Box 3 Income Is Not Tax-Free

It's important to remember that "Other Income" is not tax-free. You must still pay income tax on incentive payments and other types of Box 3 income, just not Social Security or Medicare taxes. The amount you enter on your 1040 will be taxed along with all of your other regular earnings according to your appropriate tax bracket.

This could mean that the withholding from your other earnings won't be enough to cover taxes due on the Box 3 windfall. Rather than receive a refund, you might end up owing tax when you file your return—just not as much as you would have if you'd also had to pay FICA taxes.

You can make estimated payments to the IRS in advance of filing your tax return. Otherwise, you can probably expect a tax bill come April if your incentive payments or other income were significant.

Frequently Asked Questions (FAQs)