I am self-employed and issue invoices to Tennessee for services rendered. A third party company is a factor that remits payment to my company and they take 10 percent of money due and pay immediately instead of waiting for the state to pay. At the end of the year I receive two 1099-MISC forms reporting non-employee compensation. How should I report this for tax purposes?

ANSWER

The BIDaWIZ Team's Answer:

To clarify, you bill the state of Tennessee, but the state uses a third party (i.e. a factor) to remit payment to you? At the end of the year, you receive a 1099 from the state as well as from the third party? This situation is governed by the assignment of income for 1099 reporting as governed in the the 1930 tax case of Lucas v. Earl. Essentially the originally payor (i.e. the state of Tennessee) should issue the 1099 to you and not the factoring company as they have less control over the business transaction. You should request that the factoring company issue an amended 1099 to correct the situation and you can document this on your tax return. It is best to report the incorrect amount on your Schedule C as income and report an expense on line 48 of Part V for the difference and document the mistake for the IRS.