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Just went through this exact situation. Make sure you also check if you're subject to the 6% excess contribution penalty. If you removed the excess before your tax filing deadline (including extensions), you should be fine. But if you didn't, you might need to file Form 5329 for the year you made the excess contribution. The JP code on your 1099-R is important - it tells the IRS this was a corrective distribution of excess contributions. The "J" means early distribution, and the "P" indicates the removal of excess contributions.
Wait, now I'm confused. I thought the 6% penalty doesn't apply if you take out the excess contribution plus earnings before the tax filing deadline. Is that not right?
You're absolutely right, and I should have been clearer. If you remove the excess contribution plus earnings before your tax filing deadline (including extensions), then the 6% penalty doesn't apply. The 6% penalty only comes into play if you don't remove the excess contribution in time. Since the original poster removed the excess before filing their 2023 return, they shouldn't be subject to the 6% penalty at all.
I've been a tax preparer for years and see this situation all the time. Just remember that the earnings portion ($900.06) is taxable in the year you take the distribution (2024), NOT the year you made the contribution. That trips up a lot of people. If you're under 59½, you'll also owe the 10% early distribution penalty on just the earnings portion. The original $6500 contribution comes back to you tax and penalty free.
Thank you for clarifying that! So just to make sure I understand completely - the $6500 comes back with no tax or penalty, but the $900.06 in earnings will be taxed as regular income plus a 10% penalty (I am under 59½). And all of this goes on my 2024 return since that's when I received the 1099-R, correct?
That's exactly right! The $6500 comes back to you tax and penalty free. The $900.06 in earnings will be taxed as ordinary income on your 2024 return, plus you'll pay the 10% early withdrawal penalty on just that earnings amount. Everything will be reported on your 2024 return because that's when you received the 1099-R. Your tax software should handle this correctly when you enter the 1099-R with distribution code JP.
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For those still confused about 1099-NEC boxes, here's a quick breakdown: Box 1: Non-employee compensation (the main one) Box 4: Federal income tax withheld Boxes 5-7: State tax information Box 2: Not used currently (was for royalties on old 1099-MISC) If you're getting a 1099-NEC, remember you're considered self-employed and need to file Schedule C. Don't forget about the self-employment tax (Schedule SE) which is roughly 15.3% on top of regular income tax.
If I have business expenses, can I deduct those to reduce the amount I pay self-employment tax on? Like if I got $8000 on my 1099-NEC but had $2000 in legitimate business expenses?
Yes, you can absolutely deduct legitimate business expenses, and this will reduce both your income tax and self-employment tax. Using your example, if you earned $8,000 and had $2,000 in business expenses, you would only pay self-employment tax on the $6,000 profit. Common deductions for freelancers include home office (if you have a dedicated space), business-related travel, professional development, software subscriptions, portion of internet/phone, office supplies, and insurance. Just make sure to keep good records of all expenses in case of an audit.
Do I need to worry about state taxes with a 1099-NEC? My client is in a different state than where I live.
Generally you pay state taxes where you performed the work, not where the client is located. So if you're working from your home in State A for a client in State B, you'd typically only file taxes in State A. However, some states have special rules, especially for higher income amounts. If Box 5-7 on your 1099-NEC are filled out indicating state tax withholding, you might need to file in multiple states. Might be worth consulting with a tax pro if that's your situation.
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Has anyone mentioned the Recovery Rebate Credit? If you claimed it on your taxes but already received your stimulus payments, the IRS will automatically correct your return and reduce your refund. I've seen this happen a lot this year where people accidentally claimed stimulus money they'd already received.
The Recovery Rebate Credit was for tax years 2020 and 2021. It wouldn't apply to 2024 returns filed this year unless they're filing an amended return for those years.
Whatever you do, don't ignore this! My brother had something similar happen last year (expected $4200, got $340), and he just shrugged it off assuming it was some kind of legitimate adjustment. Six months later, he started getting collection notices from an agency claiming he owed money for a medical debt he never knew about. Turns out, that's what triggered the offset, but because he never followed up, the remaining balance was still considered active debt. Now he's dealing with credit score damage and aggressive collectors. Call the Treasury Offset number mentioned above (1-800-304-3107) ASAP, and if you can't get clear answers, consider using one of the services others have mentioned. You need to know exactly what happened so you can address it properly.
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Have you looked at Line 2 of his W-4? If that's blank or has a low number, it could explain the low withholding. The 2020 and newer W-4 forms don't use "exemptions" anymore - they use a totally different system. What might have happened is his employer migrated from the old W-4 system to the new one, and something got lost in translation. When my company did this, they defaulted everyone to the standard deduction with no adjustments unless you submitted a new form. I'd suggest filling out a brand new W-4 using the IRS Tax Withholding Estimator tool on the IRS website. It's surprisingly accurate and will tell you exactly what to put on each line of the W-4 to get the right withholding. For this year, you might want to withhold extra to cover what you'll owe plus what you already owe from last year.
The form he filled out definitely still had the exemptions line, so I think they're using the old version. I didn't know they changed the W-4 format! This is helpful - we'll definitely check out that Withholding Estimator tool and submit a new form. Would that potentially help prevent this same issue next year?
Yes, submitting a new W-4 using the current format would definitely help prevent this issue next year. The new W-4 is much more accurate, especially for couples where both spouses work. The Withholding Estimator will actually let you adjust things so you can "catch up" on withholding for the rest of this year too. There's a specific section where you can enter how much you've already had withheld this year and how much you expect to owe, and it will calculate higher withholding for the remaining paychecks to help cover the difference. I do this every June as a mid-year checkup and it's been spot-on for the last few years.
Wait, something doesn't add up in your numbers. At your income levels, a $4,400 federal tax bill actually sounds about right if you're filing jointly. With $105K combined income, your federal tax would be roughly in that range after the standard deduction. Are you sure the issue is with his withholding being too low, or could it be that both of your withholdings are a bit low? If you've always gotten refunds before, maybe something else changed this year - did either of you have any other income sources? Investment gains? Retirement withdrawals?
I was thinking the same thing. Using a quick tax calculator, married filing jointly with $105K income would have a federal tax of around $9-10K total. If they each had some withholding (even if his was low at 1.5%), the final bill being $4.4K doesn't sound wildly off.
KylieRose
I'd just report it as miscellaneous income and not worry about Schedule C. The IRS isn't going to come after you for a small grant payment. If it's not recurring income from self-employment, why bother with all the extra paperwork?
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Miguel Hernández
•Please don't give advice that could get people in trouble. The IRS's automated systems will absolutely flag a mismatch between a 1099-NEC they received from the issuer and what's reported on your return. If the issuer designated it as nonemployee compensation, you need to address it properly or risk getting a CP2000 notice.
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KylieRose
•I'm just speaking from experience. I've received various small grants and honorariums over the years and always put them under miscellaneous income without issue. The key is that they're not part of an ongoing business activity. The IRS doesn't have the resources to audit everyone over small discrepancies. As long as you're reporting the income somewhere on your return and paying the tax due, they generally don't care exactly which line you put it on.
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Sasha Ivanov
Has anyone tried calling the organization that issued the 1099-NEC? I had a similar issue with a teaching stipend last year, and when I called the organization, they admitted they probably should have issued a 1099-MISC instead for Box 3 (Other Income) rather than a 1099-NEC.
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Liam Murphy
•This is actually really good advice. The organization might have used the wrong form. Since 2020 when they split the 1099-MISC and created the 1099-NEC, a lot of organizations get confused about which one to use for things like grants and scholarships.
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