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I am a grad student, and am supported by a living stipend from a government supported fellowship program. The contracted company managing this program sent everyone MISC-1099 forms, and reported the stipend payments in box 7.

The tax program I'm using (FreeTaxUSA) requires me to fill out information for Schedule C if I enter the 1099-MISC as I received it. However, that subjects me to SE taxes, which is incorrect, as per this document: https://www.irs.gov/pub/irs-pdf/p970.pdf.

If I simply don't report the MISC-1099 form, but do report the income (correctly - as a scholarship in 'other income'), then I'm afraid the IRS will question why I didn't report the MISC-1099.

How do I deal with this?

(I've seen at least one potential way forward, but it seems a little questionable to me. I'll post it as an answer below for discussion.)

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  • Also related: money.stackexchange.com/questions/45973/… (however, the situations are different enough, that I don't think my question should be considered a duplicate).
    – argentum2f
    Commented Feb 13, 2018 at 18:47
  • Also related: money.stackexchange.com/questions/13971/… (however, in that case he doesn't mention MISC-1099 box 7. If that isn't a problem, then the answers there are correct. He should just enter the income as a scholarship. Problem solved.)
    – argentum2f
    Commented Feb 13, 2018 at 18:52
  • Is the benefit you receive in exchange for services you are required to perform?
    – Hart CO
    Commented Feb 13, 2018 at 18:54
  • No. It is a fellowship. It is not tied to the school, so I technically don't have to do any research, TA'ing or anything if I don't want (unless I want to graduate...). There could be some legal gray area here, as the program is setup to get you to work for them after graduation. However, that depends on whether or not they decide to hire you at the end, and they don't hire everyone who goes through the program. Basically, "we'll give you this fellowship to get you through school, but when you're done, we get first choice on hiring you."
    – argentum2f
    Commented Feb 13, 2018 at 19:11
  • Since it's non-compensatory (fellowship grant), they've mis-reported this and are setting you up for a hassle if audited. Did you contact the issuer? Form 1099 instructions clearly state that it should not be used for scholarships or fellowship grants.
    – Hart CO
    Commented Feb 13, 2018 at 19:51

1 Answer 1

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One recommendation I have seen, is to go ahead and file the 1099-MISC as normal. Then enter the full amount as a 'business deduction' (i.e. nullifying the impact of schedule C), then enter the full amount the proper way - as scholarship income. This way the MISC-1099 is reported, and I pay taxes as I should.

This recommendation comes from a TurboTAX Q&A: https://ttlc.intuit.com/questions/3784995-1099-misc-for-a-stipend-payment-where-do-i-put-it

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