Question About Reporting Referral Bonus on 1099-NEC
Hello,
I received a referral bonus from Rakuten and was issued a Form 1099-NEC for this income.
When entering the 1099-NEC information in FreeTaxUSA, I am prompted to categorize this income, but the system only provides the following options:
- Farm income
- Farm rental income
- Business income
- This income should be reported as wages
However, the referral bonus does not appear to fit any of these categories. It is not related to farming, rental activity, or an ongoing business, and it was not wages from an employer.
Could you please advise how this type of referral bonus income should be reported in FreeTaxUSA, and which option I should select to ensure it is filed correctly?
Thank you very much for your help.
Answers
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The IRS instructions for Form 1099-NEC state that business owners must file that form for each person who is not considered their employee to whom they paid at least $600 during the year for services performed -see pg 7
This means that you received Form 1099-NEC instead of Form W-2 because the payer didn't consider you an employee and didn't withhold income tax or Social Security and Medicare taxes.
The IRS generally expects to see nonemployee compensation from Form 1099-NEC reported as business income on Schedule C, even if you don't officially own a traditional business. That way you can pay any applicable social security and Medicare taxes that weren't withheld from your income.
You can refer to the following IRS link for more information:
https://www.irs.gov/faqs/interest-dividends-other-types-of-income/1099-misc-independent-contractors-and-self-employed/1099-misc-independent-contractors-and-self-employed-3If you decide to report your 1099-NEC income on Schedule C, the software will walk you through the process of attaching your 1099-NEC to a Schedule C. Even if you don't own a traditional business, just answer the questions as they apply to your situation.
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