RAFA Pass Travel 1099 Box 7 vs Box 3 2/22/2014
This is tax filing information for retirees who received a 1099-MISC from United for pass travel.
If you did not receive a 1099-MISC from United, you may ignore this article.
Using box 7 instead of box 3 will cost retirees more in taxes
Like last year, United has placed retirees’ imputed income from pass travel in Box 7 “non-employee compensation” on 1099-MISC forms. Box 7 is normally used for vendors/contractors who accrue income by performing a service for United and it usually triggers the need to fill out a Schedule C and pay self-employment and Social Security taxes in addition to regular federal/state taxes. Retirees are…..retired, we do not “perform a service” for United and should not have to pay those additional SE or SS taxes or even fill out a Schedule C, right?
Unfortunately, United Airlines will not change how it files nor will it amend the 1099-MISC forms. I emailed Chris Kenny, United’s VP & Controller. He replied, “Our reading of the IRS rules requires this be reported in box 7. The pass travel benefit retirees receive is in exchange for the service they provided when they were active employees and is not tied to the current year”. On the other hand, Mr. Kenny also stated: “I checked with our internal tax department and they indicated that there is no clear IRS official ruling on this matter.”
So, I called the IRS Help Line (800-829-1040, opt 1, 2, 2, 4, 1), asked for a “1099-MISC specialist” and waited approximately 60 minutes on hold. The agent could not find any ruling in the tax code about box 7 or box 3 for retirees. The agent agreed that retirees do not “perform services” for United so they should not have to fill out a Schedule C. The agent then suggested retirees declare pass travel imputed income as if it was listed in box 3: Put it on line #21 of form 1040 and write “retired employee benefit” on the dotted line. The IRS Help Line agent said that “could possibly” trigger an audit, but, in that unlikely event, retirees should explain they did not “provide a service” to United during the tax period, therefore the income should be in box 3, not box 7.
I have spoken to several retirees and they tell me:
1) When income is reported in box 7, some tax software programs will ask the user questions, then move it to box 3 and place the income on line 21 of form 1040.
2) CPAs agree retirees’ pass travel imputed income should be in box 3.
3) Conservative CPAs may advise clients to leave it in box 7 and pay the extra tax to avoid the possibility of an audit. Other CPAs advise box 3 with a note saying United is using the wrong box.
Bottom line: Retirees should consult with their CPA or the IRS to determine the best method of declaring pass travel imputed income on their IRS tax returns.
More info: read the Costs and Imputed Taxes page in "Specific Info" submenu to the left.
Pass Travel Report info: read #4: January 2014 Pass Travel UPDATE
Compiled by Kirk Moore, RAFA Travel Benefits Committee