FAQ's >> Income
Listed below are examples of frequent tax-related questions with corresponding answers. While many issues may seem straightforward, the
answers to many of these questions illustrate the complexity of the U.S. taxation system. For further assistance with these or any other tax
issues, please contact us.
Although the information provided herein is derived from data published by the Internal Revenue Service, it is not considered authoritative,
and should only be used as a general guide to understanding the underlying issues. Authoritative guidance should be obtained from a tax
professional or directly from the Internal Revenue Code, Regulations, Revenue Proclamations, Publications, Bulletins, Announcements, etc.
I received a Form 1099-MISC instead of a Form W-2. I’m not self-employed. I do not have a business. How do I report
this income?
you provided is listed as non-employee compensation on Form 1099-MISC, you are being treated as a self-employed worker, also referred to as
an independent contractor. You do not necessarily have to “have a business”, but simply perform services as a non-employee to have
your compensation treated this way. There is no statutory definition of an employee, but from common law three basic areas have been
identified:
behavioral control,
financial control, and
type of relationship.
If you meet the definition of an employee, your options include contacting the employer for corrected forms or reporting the
misclassification on your Form 1040 to reduce your liability for Social Security and Medicare taxes.
I received a Form 1099-MISC for an employee bonus. How do I report it?
Employee bonuses should be reported on Form W-2, not on Form 1099-MISC. Contact your employer and ask them to issue the correct form. If
they will not issue you a Form W-2 for the bonus, you may need to complete Form 4852, Substitute for Form W-2, Wage and Tax Statement. The
bonus amount is added to your other Form W-2 wages reported on your Form 1040, 1040A or 1040EZ.
I am self-employed. How do I report my income?
You are a sole proprietor if you are the sole owner of a business that is not a corporation. Report your income and expenses from your
sole proprietorship on Form 1040, Schedule C, Profit or Loss from Business.
If the total of your net profit from all businesses is $400 or more, you must also pay into the Social Security system by filing Form
1040, Schedule SE, Self-Employment Tax.
Are alimony payments considered taxable income?
Alimony, separate maintenance, and similar payments from your spouse or former spouse are taxable to you in the year received.
A payment to or for a spouse or former spouse under a divorce or separation instrument is alimony, if the spouses do not file a joint
return with each other, if the following conditions are met:
- The payment must be made by cash, check, money order, etc.
- The instrument does not designate the payments as “not alimony”
- The spouses are not members of the same household at the time the payments are made.
- There is no liability for payments after the death of the recipient spouse.
- The payment is not treated as child support.
Are child support payments considered taxable income?
No. Some types of income taxpayers receive are not taxable and child support is one of them.
Is money received from a legal settlement taxable?
For court awards and damages, to determine if settlement amounts you receive by compromise or judgment must be included in your income,
you must consider the item that the settlement replaces. Following are some examples of settlement items reportable as ordinary income:
Interest on any award.
Compensation for lost wages or lost profits in cases. Other than those where the payments are for
wages lost as a result of physical injury.
Punitive damages
Amounts received in settlement of person rights (if you did not contribute to the plan).
Damages for
- Patent or copyright infringement
- Breach of contract
- Interference with business operations
Any recovery under the Age Discrimination in Employment Act.
Injury to your reputation.
Alienation of affection.
Do not include in your income compensatory damages for personal physical injury or physical sickness (whether received in a lump sum
or installments).
Damages for emotional distress due to a physical injury or physical sickness are not taxable.
Punitive damages are taxable. It does not matter if they relate to a physical injury or a physical sickness.
I received damages for emotional distress suffered as a result of employment discrimination. Is the money I received
taxable?
Emotional distress is not considered a physical injury or physical sickness; therefore, damages for emotion distress are includible in
income except to the extent they are paid for medical care attributable to emotional distress.
Do I have to pay tax on reinvested dividends?
Dividend reinvestment plans let you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead
of receiving the dividends in cash. If you are a member of this type of plan and use your dividends to buy more stock at a price equal to its
fair market value, you must report the dividends as income.
I am receiving long-term disability. Is it considered taxable?
Generally, you must report as income any amount you receive for your disability through an accident or health insurance plan paid for by
the employer.
If both you and your employer have paid for the premiums of the plan, only the amount you receive for your disability that is due to your
employer’s payments is reported as income. If you pay the entire cost of a health or accident insurance plan, do not include any amounts you
receive for our disability as income on your tax return. If you pay the premiums of a health or accident insurance plan through a cafeteria plan,
and the amount of the premium was not included as taxable income to you; the premiums are considered paid by your employer, and the disability
benefits are fully taxable.
