TurboTax Blog

I Received Form 1099-MISC... But I Don't Own a Business!

Lots of questions asking what to do when you get Form 1099-MISC... and you don't own your own business but instead you're an employee of another company. Yet you get this form; what do you do with it?

The short answer is: if your Form 1099-MISC shows an amount in Box 7 for nonemployee compensation and it's because you did consulting work or other services for someone, you DO now "have a business!" You're in the business of consulting, and you have to file Schedule C to report that 1099-MISC income. This is a requirement, not an option!

The good thing about filing Schedule C is the ability to apply any expenses you incurred while performing those services. Think about what you did: did you drive places during the course of the work you did?  Take a mileage deduction. Did you buy computer or office supplies to use during the consulting? Take an office supplies deduction.

The only downside is that you'll be subject to self-employment tax on your consulting earnings... which is basically the self-employed person's equivalent of social security and Medicare tax that employers normally withhold from your paychecks. That tax is calculated on Schedule SE, and you'll see an amount appear on Form 1040, line 58.

Why is the Refund Amount Changing When I Enter a Rollover Distribution?

Another thing we're seeing with some regularity... folks entering Form 1099-R to report a distribution from a 401(k) or some other pension plan into an IRA are seeing their refunds go down (or taxes due go up) in the Refund Monitor when they enter the 1099-R... even when it's a rollover!

Rollovers aren't taxable as everyone knows... but here's what's happening: when you start your entry of the 1099-R, and enter box 1 as the gross distribution, then enter box 2 as taxable distribution, that taxable distribution will immediately cause the behind-the-scenes calculations to run and your refund or tax due in the Monitor will change right away.

As you progress down the form and enter the distribution code "G" (rollover), you'll see that Refund Monitor change back to where it was before you made the box 2 entry!

So... it's just a timing thing!

About Withholding on Retirement Withdrawals

We're seeing several questions from people about 401(k) or retirement plan withdrawals from which income taxes have been withheld.

Folks appear to be under the impression that once they've had taxes withheld on distributions from their 401(k)s or retirement plans, they've "already paid taxes" on the withdrawals and don't need to report the withdrawal or the income tax on their tax returns... "I've already paid the tax on this; why do I have to pay it again?"

Here's the straight talk on this situation: in general, when a 401(k) or 403(b) plan pays a distribution to you, the federal government requires that 20% of the distribution is withheld from the distribution for income taxes. This is just like the federal income tax withheld from your W-2... it's kind of an "advance payment" on the income taxes that will be due on the taxable income you're getting as a result of the withdrawal. There are certain exceptions from this withholding rule, like when you receive payments over time or when it's a distribution due to hardship.

Your withdrawal gets taxed at your regular income tax rate, not at 20%. This means that if you have a lot of other income, or if that withdrawal was a lot of money, you're very likely in a higher tax bracket than 20%: could be 25%, 28%, 33% or higher. The distribution gets added to your other income, then your income tax is figured on the total taxable income (after deductions). Your withholding, including the 20% withheld from the withdrawal, reduces your taxes due along with the withholding from any other sources like W-2s. You'll see that 20% included on line 64 of Form 1040 along with any other withholding.

By the way, a 401(k) or 403(b) plan is required to withhold 20% if it is not a direct trustee-to-trustee transfer (rollover with code "G" on Form 1099-R). If it's a distribution from an IRA,there is no requirement that income taxes be withheld. Also, states may have withholding requirements as well.

Where Does Form 5498 Go?

Where does the information on Form 5498 go in TurboTax? Here's a quick guide:

Box 1, IRA Contributions: In the Deductions section, choose 10. IRA Contributions, then mark that you have a traditional IRA. Enter your total traditional IRA contributions for 2005... this amount will appear on line 1 of our IRA Contributions Worksheet.

Box 2, Rollover Contributions: these are entered in the Income section under 5. IRA & Pension Distributions. The important thing here is that, in most cases, you'll also have received Form 1099-R from the Pension or 401(k) administrator that actually paid the money into your IRA. You enter the information from the 1099-R into TurboTax in this case, not the information from your Form 5498... if you have a 1099-R for your rollover, just disregard your Form 5498 box 2 entry.

Box 3, Roth IRA Conversion Amount: again, as with a rollover contribution, you'll have received Form 1099-R from your IRA trustee showing a distribution from your traditional IRA to a Roth IRA. You'll enter the 1099-R information in this case, just like above, and just disregard the Form 5498 entry.

Box 5, Fair Market Value: this is the only entry on Form 5498 for many people, and it's only important when you took money out of your traditional IRA AND you had "tax basis" in your IRA accounts. "Tax basis" exists whenever you made contributions to that IRA with after-tax dollars... such as nondeductible IRA contributions or rollovers from non-tax deferred retirement savings plans. Most of the time, your IRA won't have any tax basis, especially if you created it through a rollover from a 401(k) plan. In any case, the only time you'll need this box 5 number is when you DO have a tax basis in your IRAs AND you took money out. This isn't that common. If you do need to enter this number, you'll be asked for it when you enter your Form 1099-R for your IRA distribution.

Box 10, Roth IRA Contributions: This goes in the Deductions section, under 10. IRA Contributions. You'll check the Roth IRA box when asked what type of IRA, then you'll enter this amount when TurboTax asks for your total Roth IRA contributions. The amount will appear on line 18 of the IRA Contributions Worksheet. These are NOT deductible! However, whether you can contribute is controlled by income limits... therefore, it's important to enter this info into TurboTax.

What Do You Do with Form 5498?

We've received a lot of enquiries asking where to enter Form 5498 in TurboTax, so we thought we'd start out with this topic. Our retirement tax expert provides this information to share...

Form 5498's title is IRA Contribution Information, and it's usually sent by your IRA trustee to report your IRA activity to the IRS. You get a copy of this form too.

Information reported on Form 5498 is entered in several different places in TurboTax when that information is needed, but almost all of the time it's information that you already know:

• The amount of the IRA contributions you made for the year, whether by rollover from a 401(k) or by directly writing a check,
• The value of your IRA accounts as of the end of the year, and
• Any transfers you made to move money from a regular IRA account to a Roth IRA account

If you took money out of your IRA, those distributions would show on the Form 1099-R you receive from the IRA trustee. That's the form that you need to enter into TurboTax.

Here's another interesting fact: the trustees aren't required to submit this form to the IRS until MAY 31, well after you file your tax return, so you may or may not receive Form 5498 until later. This won't stop you from filing your tax return, though: you can get all the information you need to report your IRA contributions, value, etc. from your IRA's year-end statements, so don't hold up filing your return.

And by the way, trustees, NOT individual taxpayers, are required to file Form 5498 with the IRS. This means that you don't need to send Form 5498 along with your tax return; you just hang onto it with the rest of your tax paperwork.

Welcome!

Welcome to the TurboTax Support Team Blog! Folks in the TurboTax support community are launching this blog to focus detailed attention on the areas in TurboTax that vex our customers most... like retirement topics, rentals, or whatever you're finding that you'd like more information about...

Our team has tax experts (some of whom develop TurboTax as their day jobs), technical experts and in general, people who know TurboTax inside and out!

Here's what we plan to do:

We'll pick a topic that customers are hashing over in the forums, and we'll expand on that topic here to cover in one place most of the issues folks are having with that area.

Once we've received comments and recommendations from you, we'll work with our developers to improve TurboTax in that area -- and, at the same time, get improved information out on our Web sites.

We'll start out with a couple of retirement tax topics (not the easiest thing to deal with tax-wise), but please tell us what YOU'D like to hear us blog about!

Add your comments below...we do review comments ahead of time, so your comments won't appear right away, though we'll post them once we've had a chance to review.

Let's try this out! We look forward to hearing from you!