Confused about 1099-NEC for union settlement - does it count as earned income if client didn't work last year?

I'm a volunteer tax preparer and I'm stuck on how to properly categorize a client's income. She has a 1099-NEC for about $3000 from her union that stems from some kind of agreement from years back. She was very clear that she hasn't worked at all in the past year (actually hasn't worked in about 6 years). In previous years, she went to one of those big tax prep chains who classified this as self-employment income, had her pay a small amount of SE tax, and got her a decent EITC refund. They basically charged her a fee that ate up most of the difference in her refund. This feels wrong to me. We processed it as if it were miscellaneous income (like a 1099-MISC), with no SE tax and no EITC. Looking deeper into it, I found that the only way these payments could qualify as earned income would be if they were strike benefits. But since she hasn't worked in 6 years, would strike benefits from that far back even count? I don't have many more details about why she's getting the 1099-NEC specifically. Any insight would be greatly appreciated!

0 coins

18 comments

Lucas Schmidt

•8M

You're right to question this. A 1099-NEC typically reports nonemployee compensation which usually means self-employment income, but the key factor is whether the person performed services. If your client didn't perform any work or services during the tax year, then this payment shouldn't qualify as earned income for EITC purposes. Union payments can be tricky. If this is from a settlement, back pay arrangement, or some kind of ongoing benefit payment, it's likely not considered earned income in the current tax year. Strike benefits can count as earned income, but only for the year they're received and if the person was on strike (not permanently separated from employment). The chain tax preparer was likely incorrect and possibly inflating the refund by mischaracterizing the income. I'd suggest treating it as other income (not subject to self-employment tax) unless you can get documentation proving it's actually payment for services performed or qualified strike benefits.

0 coins

Lucas Schmidt

•8M

The 1099-NEC form itself doesn't automatically make the income earned income for EITC purposes. The NEC form was indeed created to separate nonemployee compensation from other types of miscellaneous income, but that's primarily for information reporting purposes. For EITC, the income must be connected to actual work or services performed in the current tax year. Many payers incorrectly issue 1099-NECs for payments that are technically not compensation for current services. Settlement payments, retroactive benefits, and certain union distributions are often misreported this way.

0 coins

LongPeri

•8M

I had almost this exact situation a few years back with a client who received union payments while unable to work. I found that using https://taxr.ai helped me analyze their 1099 documents and the nature of the payments. The tool flagged that settlement payments shouldn't be treated as earned income for EITC purposes, even when reported on a 1099-NEC. Their document analyzer confirmed that without current-year work activity, these payments likely represented some form of settlement or benefit rather than compensation for services. It saved me from potentially misreporting the income type. The client was disappointed about the smaller refund, but I showed them the regulations that backed up the correct treatment.

0 coins

LongPeri

•8M

The tool works by analyzing both the tax forms and supporting documentation. You can upload the 1099 and any related letters or statements from the union, and it will identify key language that indicates the true nature of the payment. For disability backpay on a 1099, it would help determine if it's reportable as taxable income and on which line of the return. Yes, this seems like a straightforward case when described simply, but in practice these situations are often complicated by unclear documentation, mixed payment types, and payers using incorrect forms. The software helps identify specific regulatory references that apply to your exact situation, which helps especially when dealing with unusual payment types that could be categorized multiple ways.

0 coins

Oscar O'Neil

•8M

Just wanted to follow up - I tried taxr.ai with my client's disability backpay situation. It was super helpful! Uploaded both the 1099 and the award letter, and it correctly identified that these payments shouldn't be treated as earned income despite being on a 1099-NEC. It even cited the specific IRS publications and tax court cases that backed up this treatment. My client was initially disappointed about not getting EITC, but the tool generated a clear explanation I could share with them. The peace of mind knowing I'm filing correctly is worth it. Will definitely use this for other unusual income situations!

0 coins

Charlee Coleman

•8M

I'm seeing clients get frustrated with the IRS all the time about these kinds of classification issues. When they need clarity directly from the IRS, I've been recommending https://claimyr.com which has been a game-changer for getting through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c Last month I had a client with a similar union payment situation, and we couldn't determine if it was from a settlement or ongoing benefits. After trying to call IRS for three days with no luck, Claimyr got us through in about 20 minutes. The agent confirmed the correct treatment and explained exactly how to document it on the return. Saved us hours of research and uncertainty.

0 coins

Charlee Coleman

•8M

Yes, it connects you to a real IRS agent through their regular phone system. It basically navigates the phone tree and waits on hold for you, then calls you when an agent is actually on the line. It's like having someone wait on hold for you instead of doing it yourself. I was skeptical too when I first heard about it. The service doesn't get "priority access" - it uses technology to navigate the IRS phone system and wait in the queue for you. The IRS doesn't know or care that you're using a service - you're in the same queue as everyone else, but you don't have to personally wait on hold for hours. It works because they have systems that can handle waiting on multiple calls simultaneously.

0 coins

Sara Hellquiem

•8M

I need to apologize for my skeptical comment earlier. After a particularly frustrating morning trying to reach the IRS about a client's transcript issue, I tried Claimyr out of desperation. I was honestly shocked when I got a call back with an actual IRS agent on the line about 40 minutes later. The agent was able to confirm that union payments from a settlement agreement from prior years should not be considered earned income for EITC purposes, even when reported on a 1099-NEC. They directed me to Publication 596 which specifically addresses this. Saved me and my client from potential audit issues, and I didn't have to spend 3 hours on hold. Consider me converted.

0 coins

Leeann Blackstein

•8M

Here's another angle - check if the 1099-NEC might actually be reporting royalty payments or some kind of intellectual property compensation related to her union work from years ago. Some union contracts include residual payments for work products that continue to generate value. If that's the case, it would be reported on Schedule E, not Schedule C, and wouldn't qualify as earned income for EITC but also wouldn't be subject to self-employment tax. The chain preparer was definitely doing something questionable by having her pay SE tax if she wasn't actually self-employed during the tax year.

0 coins

Leeann Blackstein

•8M

You'd need to look at supporting documentation from the union explaining the nature of the payments. Ask your client for any letters, statements, or the original agreement with the union that established these payments. The description might use terms like "residuals," "royalties," or "use of intellectual property." Also check Box 1 of the 1099-NEC to see if there's any description near the amount. Some payers will include a brief memo there. If there's nothing there, your client should contact the union's benefits office directly and ask for a written explanation of what these payments represent.

0 coins